In my blog of May 30, 2014, ‘Are our bankers listening or caring?’ I drew attention to a conference in London on ‘Inclusive Capitalism’. At that conference the Governor of the Bank of England and the IMF Chief both 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 the Governor and the IMF Chief said that the actions of the banks were excluding them from mainstream society.
Just look at the combined salaries of our four bank CEO’s, $35 m last year to see the validity of those comments
Money and finance are critical in a modern economy and society. But is the financial sector making a social contribution to match its size, profitability and very high executive salaries?
Our four major banks made a combined profit of over $27 b last year. They are the most profitable in the developed world thanks in part to government guarantees and lender of last resort guarantees. It is not all due to the skill of our bankers. Australia has a population of only 25m But the Commonwealth Bank of Australia has a market capitalisation that is more than Goldman Sachs or American Express
The global savings glut in the 1980’s was fuelled by China keeping its exchange rate artificially low and its staggering trade surplus. This created the condition that encouraged US banks to sell more risky products to increase their returns. We saw dubious new ‘products’ like packaged sub-prime mortgages and various “derivatives”. There was excessive profiteering and excessive salaries by dealers. The selling of shonky financial products out of New York gave us the GFC.
The financial sectors in many countries have become so large and powerful that governments find it hard to control them. They are too big to fail. So governments inevitably step in to prop them up and in the process reward those who take excessive financial risks. No-one went to goal in the US, but millions of US citizens lost their homes and their savings. .
In 2001, the Australian financial sector accounted for about 9% of our GDP and less than 4% of our total employment. A decade later our financial services sector had grown to 11% of our GDP. Has there e been an increase in social value to match this growth? I doubt it.
A lot of Australian business is focused on rent seeking through lobbying rather than real wealth creation. Negative gearing and the discount on capital gains taxes which largely benefits the wealthy are funded by the banks. They have also lobbied successfully to wind back consumer protection in superannuation advice. With their lobbying and networks of influential business and political colleagues they are very powerful.
Most of the business economists we see on television or read in our newspapers are employed by the banks. They are not likely to side with consumers against the banks in their rapacious fees for superannuation advice or the conflict of advice that banks exploit to the cost of clients; Most of our business economists that we see and hear so much of are caught up in the bank drag net.
In 1972 Professor Tobin proposed a tax to ‘throw some sand into the wheels of international markets and to reduce speculation’. But the problem was how national governments could impose an effective and a comprehensive tax on international transactions.
However eleven leading countries in the EU have now signed on to developing by 2016 a financial transactions tax to raise money but also to limit risky market speculation. Good luck!
The G20 meeting in Brisbane in November will be also considering higher capital requirements for the banks to strengthen their balance sheets. These increased capital requirements would also require the amount of capital to be adjusted according to the riskiness of the bank’s assets. In principle this should remove the financial incentive to back risky investments.. Also on the ‘too big to fail’ problem the authorities are seeking to ensure that while deposits are guaranteed, the value of bank shares are not. In other words shareholders cannot be expected to be bailed out in the future and that will also mean that executives that destroy shareholder value will be dismissed and their stock options being worthless.
These reforms would need to be carefully managed. For example the Europeans are worried that if the repair of bank balance sheets too quickly it might lead to a drying up of bank lending and so damage the fragile European recovery.
The interim report of the Financial Systems Inquiry made some useful suggestions but major concerns are likely to continue. Three of the five members of the inquiry are former senior bankers. David Murray was CEO of the CBA for 13 years. What do they know of banking who only banking know! There must also be a major governance concern when RBA Governors and Treasury Secretaries join major bank boards after leaving office. Three have done so.It all sounds very incestuous.
We have a long way to go in banking reform. The biggest obstacle will be the banks themselves and the powerful networks they have constructed.