Australia's four major banks want to have it both ways. The banks happily accept government regulations like the deposit guarantee, which gives them a significant competitive advantage over their smaller rivals.
But when the government then demands something in return, like having the banks pass on interest rate cuts, the banks loudly demand that politicians stop telling them how to run their business.
Given that bankers make their living by making loans and then (hopefully) having those loans paid back with interest, it's surprising they forget a basic rule of human interaction. When someone gives you something, usually you have to give something in return. So it is with government. Favours from government come with strings attached.
Westpac Banking Corp boss Gail Kelly warned this week of regulatory "overkill" of the finance industry in the wake of the global financial crisis. Kelly spoke of the risk of "unintended consequences" as "lots more red tape" and "lots more paperwork" will make credit more expensive.
In fact the problem with the Rudd government's proposed national consumer credit code is not just that it will make credit more expensive, the code will actually stop some people from getting credit in the first place. Under the "responsible lending" requirements, banks will be prohibited from lending to borrowers at risk of not being able to pay back the loan.
So we've come full circle. In the United States in 1977 the Community Reinvestment Act said that banks must lend to people on low incomes. Thirty years later, in response ot the global financial crisis, here in Australia the government introduces laws that say that banks must not lend to people on low incomes. On most accounts the Community Reinvestment Act had at least some role to play in creating the conditions of the global financial crisis. Hopefully, our local efforts will not have the same catastrophic consequences as occurred in America.
There's no reason to think that Australian politicians are any better than those in America at second-guessing the commercial decisions of banks and the personal decisions of borrowers. It doesn't look like politicians have learned their lesson. Probably because it is not a lesson they want to learn. Politicians simply can't help themselves from interfering with banks, in exactly the same way as they can't stop themselves telling telecommunications companies what services to offer and how much to charge for those services.
The same goes for the government guaranteeing bank deposits. Given the circumstances of the time when it was introduced, perhaps the policy was justified. But we're nearly 12 months on from the panic of "October days" last year. The need for the guarantee has passed. So far the main effect of the guarantee has been to all but kill the competition the banks faced from non-guaranteed investments.
Gail Kelly was right, of course, when she talked about the unintended consequences of the new credit regulations. Hopefully, in the future there'll be more bank executives wishing to speak up on this and other issues. For the regulatory onslaught has begun and is likely to continue for some years yet.
However, as significant as the proposed credit code is, far more important at the moment are regulations governing the deposit guarantee and the edifice of the four pillars policy. The unintended consequences of these regulations are enormous and affect the entire financial sector. Perhaps it's not surprising that Kelly didn't venture an opinion on these other regulations given she's the boss of one of the banks that benefits from them.
When a politician stands up at a press conference and attacks the big banks for their supposedly "excessive" profits, no journalist ever points out that the size of those profits are a result of decisions made by government.
The four pillars policy was conjured up by Paul Keating in 1990, and John Howard and Kevin Rudd maintained it. A few months ago former Reserve Banks of Australia governer Ian Macfarlane commented that "ironically" the policy prevented Australia's banks from taking the sort of risks that US and European banks undertook, because Australian banks didn't need to fear being taken over and so didn't need to be constantly increasing their revenue.
Given that the four pillars policy was intended to promote competition by preventing four big banks from turning into two even bigger banks, the actual outcome of the policy is ironic indeed. So much for the claim that politicians have any idea about the consequences of the regulations they make.
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