Banking is risky business. Banking policy is even more risky. Good intentions often lead to increased moral hazard and expensive policy failure. Over the past three years we've all seen what happens to those economies with fragile banking systems.
The Rudd-Gillard government, with its poor track record of policy implementation, risks undermining our robust financial system. At his press conference, Wayne Swan made the claim that he has worked methodically and consulted widely on his Competitive and Sustainable Banking System proposals.
After Fuelwatch, Grocerywatch, the green loans scheme, the home insulation scheme and other policy failures, this is very small comfort.
Proposals to second-guess private sector pricing decisions should always be carefully considered and evaluated.
The first point to acknowledge in any banking reform debate is that Australia is well-served by its banking system. The industry is diverse, profitable and, most importantly, stable.
Swan's proposals emphasise competition and sustainability, but not stability.
When evaluating the government's reform package, the first question to ask is whether any of these proposals will benefit consumers. It is just not clear that any of these proposals will lead to a lower mortgage rate for home buyers.
To be sure, in principle having a greater choice of provider is likely to lead to lower prices; yet consumers already have substantial choice. There is no clear evidence that banning exit fees will lead to overall lower prices for customers.
The second question to ask is whether the proposed reforms will actually work to deliver ''reasonably priced credit'', whatever that means. Artificially low interest rates could lead to malinvestment (sometimes called bubbles), while making bad loans was the immediate cause of the subprime crisis. That, with some US government bungling, metastasised into the global financial crisis.
The third question is whether the proposed reforms are consistent and coherent. What economic benefit will Australia gain from the reforms? Our banking system is already strong. People who can afford home loans can get finance. True, small business loans are currently very expensive, but that is largely a function of prudential requirements and risk aversion.
Bad ideas lead to bad policy. On the issue of banking there is no shortage of bad ideas. Promoting competition at the expense of other objectives is problematic. It is widely recognised that excessive competition can lead to excessively risky banking practices and subsequently to macro-economic instability.
Swan's proposals do avoid some of the worst ideas currently on offer. There is no mention of ''utility banking'', the idea that banks should be dull and boring institutions that simply borrow and lend in small niche markets with limited growth opportunities. This idea doesn't work. Recall the 1980s savings and loans crisis and the failure of state banks here in Australia.
Another bad idea, taking root in Liberal Party circles, is the notion that any illiquid bank is also insolvent. The nature of the business means that viable and profitable banks can become temporarily illiquid. This problem has a long history and a well-known solution in the Bagehot rule -- lend at high rates to good collateral. While lender of last resort facilities are often used to bail out insolvent banks, it is not clear that taxpayers are underwriting all banking risks.
The Coalition has already proposed legislation to prevent ''price signalling''.
Yet there is no evidence to support the notion that this is a problem in Australia. The government's proposal is bad too. The ACCC harassed the fuel industry for years on this very issue. The government now proposes to remove any need for signalling cases -- read any evidence of wrong doing allowing the authorities to accuse and convict at will.
There is merit is examining the potential for a ''fifth pillar''. It seems that credit unions and building societies (really banks without shareholders) are at a regulatory disadvantage to banks. But the government doesn't propose deregulation; rather it imagines special privilege.
There is no need for that. A clear-headed analysis into the role mutuals can play in the broader banking system should be undertaken. Unnecessary regulations and impediments to their growth should be eliminated.
The idea of promoting a corporate bond market and issuing covered bonds should be well-received. The devil will be in the detail. But even this overlooks an existing source of finance that would especially benefit the mutual sector.
Credit unions and building societies are sitting on a massive stock of unused, and unusable, franking credits they pay corporate tax but cannot pay dividends. They want to distribute these credits to their depositors.
A far more sensible idea would be to recognise that unused franking credits represent a loan to the commonwealth. If the commonwealth would pay interest on unused franking credits, the non-profit banking sector would effectively have a permanent stock of AAA-rated bonds on their balance sheets. Subsequently allowing them to package and on-sell unusable franking credits would allow them to benefit from an asset they already own.
That is just one idea. There are a lot of ideas that need to be fully investigated and considered before we can know which ideas are any good, and of those which ideas could lead to good policy.
Right now we have the government promising to fast-track legislation, the opposition with its own legislation, and the Senate holding an inquiry into banking competition. It is an ugly sight.
Rather than have several inquiries and proposed legislation all running at cross-purposes, it is probably wise that a single son-of-Wallis-type inquiry take place.
A cool, calm, non-populist approach to banking policy will do more for the national interest than the bank bashing and posturing that is being passed off as banking reform.
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