17/07/2014 - 14:28

Living on borrowed time

17/07/2014 - 14:28

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Bank bashing is a national sport in Australia, often played for good reason; but the latest round of kicking banks, which started this week with the release of a report by former Commonwealth Bank boss David Murray, could not have come at a worse time.

Living on borrowed time

Bank bashing is a national sport in Australia, often played for good reason; but the latest round of kicking banks, which started this week with the release of a report by former Commonwealth Bank boss David Murray, could not have come at a worse time.

The issue is not that Australia’s big four banks are behaving badly – sometimes they do – or that they need reminding of the essential community service they provide (in addition to generating profits for shareholders).

The issue is the international marketplace, because the world appears to be walking blindly into a re-run of the 2007 GFC.

Back then, and it was only seven years ago, Australia was saved from the worst recession in 80 years by a burst of debt-fuelled government spending (with taxpayers still footing that bill) and by a stable banking system that resulted from tough regulations, which had prevented our banks from indulging in some of the sillier forms of lending that wiped out a number of overseas banks.

Today, the international banking industry is once again lending money for questionable purposes and indulging in the same type of risky syndicated loans, alarmingly similar to the sub-prime mortgages and collaterised debt obligations (CDOs) of 2007, which forced governments to mount multiple bank rescue missions.

It is impossible to predict whether we will suffer a re-run of 2007 but the signs are there for everyone to see, including share prices that bear no resemblance to underlying business conditions, and the easy money being handed out by central banks at near-zero interest rates.

Those super-low interest rates, which resulted from the original crisis, have already sown the seeds of the next crisis because customers (with the aid of willing banks) are loading up on debt in the belief that there will never be a return to higher rates, which of course there will.

The danger ahead was best explained by the world’s ultimate bank (the so-called bankers’ bank) – the Swiss-based Bank for International Settlements – which issued a warning two weeks ago in its annual report that:

“Overall, it is hard to avoid the sense of puzzling disconnect between the markets’ buoyancy and underlying economic conditions globally,” the BIS wrote.

In other words, the organisation charged with ensuring that the world’s banking system remains secure is concerned that it might not actually be secure, because stock markets are overheated and loans are being made to fund speculation rather than for productive economic investment purposes.

What the BIS can see are the seeds of a crisis that might be bigger than 2007.

It is into this increasingly dangerous world that Mr Murray and his fellow committee members have served up a report that could weaken the Australian banking system in two ways.

Firstly, Mr Murray wants to see the banks forced to boost their own level of savings by making increased provision for potential losses against mortgage defaults thanks to their heavy exposure to home loans. Such a move could lock up $6 billion, effectively removing that money from the banking system, which will hit bank profits.

Secondly, he wants life made easier for second-tier financial organisations such as credit unions and building societies so they can compete with the big four banks.

In an ideal world it would be lovely to see the return of small financial institutions, but you only have to look back a few years to see how small banks, building societies and credit unions made a mess of their loan books, thanks largely because they are forced to deal with people and companies that the big four rank as poor credit risks.

The world, as we all know, is not ideal and to think that we need a re-run of the second-tier (which really does mean second-rate) financial services mess of a decade ago is ridiculous, especially at a time when the rest of the world appears to marching towards a financial cliff.

What the Murray report has done is misread both the fragile nature of the global financial system (as seen by none other than the BIS), and misread the local political scene by handing a blunt instrument to the naïve new members of Australian Senate, who will be tempted to whack the big four banks because such an act would have populist appeal.

If we’re lucky, the Murray report will quickly disappear as wishful thinking which, oddly enough, might just be what a former Commonwealth Bank CEO would like to see happen.

All of which raises the interesting question as to whether Mr Murray has written a report designed to be ignored.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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