On Wednesday in London at a conference on ‘inclusive capitalism’ the Governor of the Bank of England, Mark Carney, and IMF Chief, Christine Lagarde, gave the international banking community the most severe pasting that I can ever recall of a particular industry, or at least one that operates “legally”.
They said that bankers regarded themselves as different and not bound by the need for economic and social inclusion that is essential in a modern society. Both Carney and Lagarde said that the actions of the banks were excluding them from mainstream society. It is true of banks in Australia as much as banks in Europe and the US.
Mark Carney said
- “Capitalism is at risk of destroying itself unless bankers realise that they have an obligation to create a fairer society”
- “Bankers had operated a heads-I-win-tails-you-lose system”. He questioned whether “Traders met ethical standards and that those who failed to meet high professional standards should face ostracism.”
- “The basic social contract at the heart of capitalism was breaking down with rising inequality.”
- “The most severe blow to public trust was the revelation that there were scores of too-big-to-fail institutions operating at the heart of finance. Bankers made enormous sums in the run-up to the [GFC] and were often well compensated after it hit. In turn taxpayers picked up the tab for their failures.”
- “One of the lessons of the GFC was that compensation schemes had delivered large bonuses for short-term returns and encouraged individuals to take on too much long-term risk. In short, the present was over-valued and the future heavily discounted.”
Christine Lagarde also cut through the bankers’ self-deluding spin.
- “The financial services industry had not changed fundamentally in a number of dimensions since the crisis”. She reeled off ‘a list of scandals, including money-laundering and the manipulation of bench marks such as Libor.”
- “Progress on building a safer financial system has been too slow, primarily because of industry attempts to halt the introduction of tougher new laws.”
- “While some changes in behaviour are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.”
The details of banking behaviour in Australia may be marginally different but the thrust of Carney and Lagarde’s criticism is valid in Australia. The moral centre of gravity of our bankers and their boards of directors is hard to discern. Consider
- The combined cash profit of the big four Australian banks last year was over $27 billion. They enjoy a government guaranteed oligopoly. Time and time again the banks refused to pass on reductions in official interest rates in Australia or the reduction of offshore rates. Surely we need a banking supertax and a Tobin tax on international financial transactions. A 0.2% levy on bank assets above $100m would raise an estimated $11 b over four years The super profits of the banks are promoting the “rising inequality” that Mark Carney warned about.
- The CEOs of the our four banks last year had a combined take-home pay of over $35 million; Cameron Clyne, NAB $7.8 million; Mike Smith, ANZ, $10.4 million; Gail Kelly, Westpac, $9.2 million and Ian Narev, Commonwealth Bank, $7.8 million. There are various share rights on top of this. These salary packages are ethically indefensible. The market is rigged by so called independent remuneration “experts”, board directors and senior executives’. Why should such CEOs expect wage restraint from anyone else? In 2001 CEOs in Australia were paid about 20 times average weekly earnings. It is now over 70 times. I see no reason why anyone should be paid more than the $500,000 salary package of the Prime Minister who works harder and takes more risks than any bank CEO. If shareholders won’t address this corporate greed, the government should do so through the tax system. The banks are working against a “fairer society” that the Governor of the Bank of England referred to.
- We recently saw on 4-Corners the Commonwealth Bank financial planning scandal which victimised thousands of retirees. Instead of facing up to the moral issues involved, the bank set its spin doctors to work. It is the sort of “scandal” that the IMF Chief would have had in mind
- The banks have been leading the charge to roll back the Future of Financial Advice (FOFA) which is designed, amongst other things, to protect superannuation contributors from the conflict of interest of financial planners employed by financial institutions. Financial advice has become a honey pot for the banks. Last year the financial advising industry pulled in $21 billion from the superannuation pool. There are 18,000 financial planners in Australia and four out of five of these are owned by a bank or an insurance company. In the name of ‘winding back red tape’ the bankers are lobbying hard to protect their oligopoly rents. Their greed must be contained. But as Christine Lagarde put it the banks want to “halt the introduction of tough new laws”
- We have grown tired of the campaign by the Coalition concerning our public debt of $300 billion. But the serious debt is household debt owed principally to the banks of almost $2 trillion. In proportion to our household disposable income this is one of the highest debts in the world. But where are the business economists, mainly employed by the banks, in warning us of the risks of this level of private debt which has been induced mainly by their employers. The banks are promoting what Mark Carney warned about ,”individuals taking on too much long term risk”
The warnings of Carney and Lagarde are highly relevant to the behaviour of Australian banks. They still regard themselves as a privileged and untouchable elite. They are losing our trust fast. They are eroding our social capital.