Public opinion and expert advice has been overturned in favour of letting banks regulate themselves. What could go wrong?
Well, our long-suffering banks finally had some good news this week.
After being frustrated at every turn in their efforts to quietly serve the community, some sensible politicians have actually had the decency to ask what they thought about something. And listened.
And so the government, ever-ready to strike out independently in the national interest, decided to scrap the bank deposit levy.
This whacky idea, which came out of that hot-bed of militant socialism – the Council of Financial Regulators – was that a tax of 0.05% should be applied to all deposits that benefited from the Government’s deposit guarantee.
The deposit guarantee you’ll remember was introduced during the GFC. At the time the government said that it will guarantee deposits up to $1m in case anything awkward happened to your bank.
Once the hoo-ha of the GFC settled down, and the financial system looked more secure – the guarantee was scaled back to $250K, but that’s still substantial.
In the twisted world view of the Council of Financial Regulators, the banks receive a lot of benefit from this guarantee, especially the Big Four with their ‘too big to fail’ status.
In their eyes, if the government is effectively seen to be propping the banks up no matter what, there’s no risk. If you lend money to the bank, you’ll get it back. Either the bank pays of the government does. Either way you’re sorted.
I’m talking about depositors here, but I’m also talking about international capital markets where the big banks get most of their funding.
And with the guarantee in place, banks can borrow at a lower cost. They’re seen to be more credit worthy. They get a discount.
(Imagine the kind of discounts you could get on your mortgage if you could put the entire Australian population as guarantor on your loan.)
And if they’re getting a discount on their borrowing, it means they get bigger margins on their lending. Bigger margins mean bigger profits.
Banks like profits.
But notice here that it’s the government guarantee (using money raised by taxes on you and me) that helps the banks make more money.
If I’m giving money to the tax man, I want it spent of submarines and koala protection zones – not helping banks make more money.
(Banks made $30bn in profits the year the deposit levy was floated.)
And so the Council of Financial Regulators thought that banks should pay something for this benefit they receive. That there should be some sort of fee attached to this free default insurance.
Fascists.
And that’s the idea of the deposit levy. The money raised would go into a quarantined fighting fund with the government to sure up the financial system if needed.
But no, Joe Hockey has listened to the community. “I have consulted with all the CEOs of the banks. They put good arguments as to why it should not proceed.”
That’s good enough for me, Joe. Good on you for taking the time to listen.
Another win for the community.
Don’t listen to those pinkos at the Council of Financial Regulators, the Reserve Bank, the IMF and the global financial community consensus on best practice. They all have a secret agenda to slip fundamental sharia socialism in the back door.
Stand strong and protect the freedom of our selfless and patriotic banks.
Oh man. I’m going to pop a gasket if I keep going like this.
This decision really does my head in. And look, maybe the deposit levy wasn’t the right way to tackle this issue. Maybe we could have got there through higher capital ratios or something.
But in dropping this proposal, the government has left the issue wide open – like a gaping chaff wound on the inside of their thigh.
And the issue is about perverse incentives. If the banks know that the government will bail them out if they get into trouble, then there’s more incentive to take more risks with prospects of bigger profits.
If the gamble pays off, sweet, big profits and a fresh case of champers in the bar fridge on your super-yacht. But if it doesn’t pay off, no worries, just send the bill on to the government.
It’s heads they win, tails we lose.
And if there’s anything to be learnt from the GFC, we need to be nipping these perverse incentives in the buds wherever and whenever they show their ugly little heads.
The financial system depends on it.
And look, I don’t really think that the banks are run by greedy reptiles who delight in human misery.
But as an organising principal for building a financial system, it’s a good idea to think that they are.
People will respond to the incentives that are in front of them. And in a competitive system, if one bank starts fudging the risks a little, then they all have to. Otherwise they’re uncompetitive.
You can’t ignore this reality.
But this is exactly what the government has done. If you want to scrap the levy because you don’t like levies, fine. But at the same time you need to scrap the implicit guarantee.
You can’t just leave it there and hope no one notices. It’s going to bit us in the arse at some point.
But no. Abbott saw a chance to help out his banking mates (the financial sector are massive donors to both parties) and run another sound byte about scrapping a Labor tax.
And something about boats.
But then, if you think Labor would have done better, you’re dreaming. The whole system is gamed.
And not in our favour.
What’s the problem here?
The banks? The government? The economy?
Or our property market?
John says
You have a few typos and repeats in this one, Jon!
Glenn Jackson says
Wealth leads to Power, Power leads to wealth , Power & wealth leads to more power & more wealth. Politics reeks of power & wealth. Power & wealth the majority of the time leads to corruption.
My view on politics is, be perceived to be searching for the truth & taking the morale high ground by appealing to the nobler motives of the people, whilst at the same time do & say everything you can to remain in power & in favor with those who are cashed up & who control the power.
Throw in religion as well & the wealth & power cycle begins again.
Cheers!
Luke Moroney says
Great thoughts Glenn.
ron says
dear jon, oh how i hate to write…..but by golly those yankee doodle dandees make us jump!! when they say poop…we poop!! our ‘politicians’ are puppets in the game called world affairs and global econo my..and refugee intakes. make no mistake each and every p.m. and treasurer, when elected,trots off to washington (haven’t you noticed?) for briefing. yes briefing…and then they come ‘home’ and read the lines they are given…sort of like puppets. ..if they don’t they end up like geoff gallop, a sudden bout of depression, or harold holt..oh i love to go down to the sea..for a lovely surf ..and meet some nice c.i.a. guys for a friendly frolic…harold had a brilliant idea three years after ‘all the way with lbj’ he actually wanted to bring the troops home from vietnam….silly man! and so life goes on..banking , politics, religion..its quite a circus really. who really know whats happening in this wonderful world?. i was told when i was about 15 years..never believe anything you hear or read and only half of what you see. not bad. but getting on specifically with the article you wrote, jon…..banksters the world over dictate policy..if you line up the names..you will see. as i have written before our banks are inextricably tied to american banks. if they fall ..well….cheers, ron
oh i just picked some nice veges out of the garden for lunch..my wife is at it right now..lucky i am in oz.
Bomber says
Hi Jon, can you please help me as I must be missing something here. Isn’t the point of the guarantee to pay back money lost in the event a bank defaults on their commitments and can’t fund the deposits they should have been holding? So how many Australian banks defaulted? None did you say? Then if no banks defaulted, how much money did the government (and by extension us the taxpayer) have to pay to cover the defaults? Rudimentary maths would suggest the answer is $0.
You actually touch on the real solution here and that is tighter controls by APRA to ensure the financial system can never go into that triple leveraged mess that the sub-prime disaster uncovered. With the guarantee must come conditions.
So tighten the lending criteria, regulate commoditised debt facilities and increase the liquidity requirements if banks are running rampant (not that they are right now), but yet another tax is not the way.
But for an intelligent bloke who has profited greatly from the banks, I find the whole tone of this article confusing. Do you have a preference to see our banks scraping together small profits 2 out of every 3 years? How do you think that would affect the Australian economy? A healthy (but well administered) banking system benefits the country greatly.
ron says
hi jon..its me again..hey do you think that anybody on this planet knows how we are gonna get out of this debt trap? current aussie gov. debt AU$389b easy to say ..but hard to repay…usa debt US$18.1bn..unheard of figures..and its all just paper..printed with govt. i.o.u.s ..govt. i.o.u.s ? and what happens when the golden goose gets its head cut off and interest rates start skyrocketing? has it happened before? of course..and when it does, people say ..oh we never saw it coming!! the media and govt. said everything is just great….like we can take more refugees than we get at a cricket match at the waca. and nurse them along with what?. i don’t mean to be callous ..but all those bleeding hearts will be looking for a feed themselves soon. take note that i have been through 6 ‘booms and busts’, and this one’s gonna be a wurlitzer. the process is always the same..and..the results are the same. information i am getting through is that 16/09/2015 is gonna be the start point and then 2 years of outright agony! say you own property positively geared ok..as long as rents stay status quo and interest rates hold up…but..and a big but..if interest rates rise rapidly and rents fall dramatically..like they will..bang goes your retirement…back to work…work? i have been in real estate for over 43 years and i have seen first hand the disasters. anyway your choice…read between the lines..come up with the worst scenario possible for your ‘portfolio’ and act el rapido!! bless you all! i hope i am wrong…dunno..see ya jon.