Blackburn Whitewash: true account of Labor's futile attempt to make its Red objective pink

There must be social justice, and we are still far from having achieved it.  But social justice will not be established by State-socialism, which means by the total-State.  The total-State implies not only the maximum of unfreedom but of injustice, too.  Acquisition by the State is the wrong way to remedy the social injustices which lie in the capitalist system as such.  The true way does not consist in making the State, which is the most abstract and impersonal institution, the decisive force in economics;  but, on the contrary, in restoring once again to those groups and institutions anterior to the State, which have been eliminated in recent developments, the meaning they ought to have according to the divine order of creation.

PROFESSOR EMIL BRUNNER, Dr. Theol., University of Zurich.
-- "Communism, Capitalism and Christianity", p. 16.

1. What is the Australian Labor Party's objective?

   It is the socialisation objective:

   "Socialisation of industry, production, distribution and exchange."

   (A.L.P. "Rules and Constitution", 1948.)

   LABOR IS AIMING AT STATE-SOCIALISM.

   
   

2. Has Labor any other objective?

   No.  The Australian Labor Party's constitution contains only one objective -- the socialisation objective.

   
   

3. What does Labor's Socialisation objective mean?

   It means that Labor intends to abolish capitalism and to replace it by socialism.

   The Scullin Socialisation Committee, reporting to the 1921 Trade Union Conference, which accepted the socialisation objective, contained this: --

   "... only by abolition of the capitalist system can working-class emancipation be achieved."

   Conference endorsed this report.

   The abolition of capitalism would be brought about by the State taking over and operating all private property used in industry, production, distribution and exchange.

   The abolition of capitalism means the disappearance of all privately owned: --

   Farms, factories, dairies, bakeries, butcheries, machinery, tools, shops, markets, taxis, ships, picture shows, theatres, also radio stations, printeries, banks and insurance offices.

   That is State-Socialism.

   Labor's platform places bank nationalisation as an essential first step in its socialisation programme.

   
   

4. How would individuals be affected if Labor completed its socialisation programme?

   Completion of Labor's revolutionary policy would:

   1. Destroy personal freedom and the right of self-expression.
   2. Rob individuals of the right to choose their own jobs.
   3. Deny to parents the right to choose careers for their children and to educate them accordingly.
   4. Abolish the rights of citizens to own and operate their own farms, factories, shops and other businesses, whether large or small.
   
   

   STATE SOCIALISM INEVITABLY LEADS TO TOTALITARIAN DICTATORSHIP.

   
   

5. But does Labor's objective really include all private property?

   Yes, all private property used in industry, production, distribution and exchange.

   Labor's socialisation objective really means: -- "Socialisation of all industry, all production, all distribution, all exchange."

   Mr. E.J. Holloway, Minister of Labor in the Chifley Government, at the 1921 All-Australian Trade Union Conference which accepted the socialisation objective, said he hoped the conference would stand for "the socialisation of all the agencies of wealth production."

   Mr. Phelan, another delegate at the same Conference, said:  "The objective was the complete taking over of the means of production, distribution and exchange."

   
   

6. Is total socialisation therefore Labor's real objective?

   Obviously yes, because the stated objective is all-inclusive.  It does not say "some industry, some production, some distribution, some exchange."

   Labor's socialisation objective excludes no industry, no production, no distribution, no exchange.

   LABOR'S ONE AND ONLY OBJECTIVE HAS ONE, AND ONLY ONE, MEANING -- UNLIMITED SOCIALISATION.

   LABOR'S OBJECTIVE IS TOTALITARIAN.

   
   

7. Is Labor's totalitarian objective supported by its printed platform?

   Yes, in many ways.

   The totalitarian character of Labor's objective is definitely implied in "Principles of Action", "Methods", and "Progressive Reforms", which are printed in the Official Report of the Triennial Conference of the Australian Labor Party held at Canberra in September, 1948.

   Among "Principles of Action" appear: --

   "(b) The national planning of the economic, social and cultural development of the Commonwealth.

   "(c) The complete control of banking and credit by the nation."

   Among "Progressive Reforms" appears: --

   "(a) The development of a planned economy throughout Australia."

   Total socialisation of the whole economy would inevitably be the result of national planning of the whole economy.

   
   

8. Isn't a totally planned economy an inevitable feature of Communism?

   It is, but it is also an inevitable feature of socialism.  That is one reason why Labor's socialisation objective is called "the Red objective".

   Labor's Red objective was "lifted" from the programme of the Russian Communists in 1921 when the A.L.P. accepted it as Labor's one and only objective.

   In 1921 Mr. E.J. Holloway was President of the A.L.P. Executive.  He presided over the All-Australian Trade Union Congress at Melbourne in June, 1921, and said: --

   "Socialisation of industry was the culmination of the teachings of Marx." (Page 5, Official Report of Conference.)

   If you think that it is merely propaganda exaggeration -- Liberal blather -- to say that Labor's socialisation objective is "Red" you should ponder over this extract from the Russian Constitution: --

   "Article 4. -- The economic foundation of the U.S.S.R. is the Socialist system of economy and the socialist ownership of the instruments and means of production, firmly established as a result of the liquidation of the capitalist system of economy, the abolition of private ownership of the instruments and means of production, and the elimination of the exploitation of man by man."

   LABOR'S AIM IS AS TOTALITARIAN AS IS THAT OF THE COMMUNISTS BECAUSE THEY HAVE THE SAME OBJECTIVE.

   
   

9. Was the A.L.P. Conference which accepted the socialisation objective fully aware of its Red origin?

   It was very much indeed.  The Conference accepted the Red objective with its eyes wide open.

   The official report of this Conference shows that some delegates fought against the proposal because of its Russian origin.  Mr. E.J. Theodore, who became Federal Treasurer, protested against Labor "being prostituted by communism".

   Attempts were made at this Conference to limit the application of the Red objective, particularly by Mr. Theodore and Mr. Blackburn, but they were unsuccessful.

   Some Labor supporters have claimed, but quite incorrectly, that the Red objective was watered down by Mr. Blackburn's interpretation clauses.

   
   

10. What were the Blackburn interpretation clauses?

    They were the three clauses contained in this Resolution: --

    "(a) That the Australian Labor Party proposes collective ownership for the purpose of preventing exploitation and to whatever extent may be necessary for that purpose.

    "(b) That wherever private ownership is a means of exploitation, it is opposed by the Party, but

    "(c) That the Party does not seek to abolish private ownership even of any of the instruments of production where such instrument is utilised by its owner in a socially useful manner and without exploitation."

    
    

11. Was the Blackburn resolution actually carried by the 1921 Labor Conference?

    The answer is both No and Yes.

    It was carried by 15 votes to 13 but the official report of the conference on page 36 contains these significant words:

    "The Chairman ruled the motion did not affect the policy already carried."

    The "policy already carried" comprised: --

    1. The socialisation objective.
    2. The methods to be used to reach this objective.
    
    

    The Blackburn resolution was inoperative from the day of its birth -- it was still-born.

    
    

12. Why didn't the Blackburn resolution affect the Red objective?

    Because, according to Rule 6 of the Standing Orders of the Conference, the resolution was not carried by a sufficiently large majority to affect the Party's platform.

    Rule 6 runs: --

    "Any motion or amendment affecting the Pledge, Platform, or Constitution shall be declared lost if less than a majority of the delegates credentialled to the Conference vote for it."

    By this rule the Blackburn resolution was lost because only 15 voted for it out of 34 "credentialled" delegates.

    Commenting on Mr. Blackburn's resolution, Mr. Theodore said sarcastically:  "It goes on to the platform;  it does not interfere with it."

    
    

13. Have the Blackburn interpretation clauses ever been a part of the Federal A.L.P. platform?

    No, never.

    Mr. Riordan, Vice-President of the 1921 A.L.P. Conference, speaking about the Blackburn resolution, said: --

    "According to the Standing Orders the motion was not carried because it interfered with something already done, and a majority of the delegates had not voted for it." (Page 36, Official Report).

    After 28 years this lost motion is still a lost motion.

    The Blackburn clauses were printed in the Official Record of the 1921 Conference but they have never appeared as part of Federal Labor's platform.

    The Blackburn interpretation clauses have had no practical effect whatsoever on Labor's policy, nor have they ever been properly endorsed as the official interpretation of the Red objective.

    
    

14. If the Blackburn clauses had been operative would they have really watered down the Red objective?

    Certainly not -- they would merely have whitewashed it.

    The Blackburn clauses, if they had been operative, would have had no other effect on the Red objective than to obscure its real meaning.

    If the Blackburn resolution had been fully passed: --

    1. It would have bluffed many people into supporting Labor who see no danger in partial socialisation.
    2. It would have salved the conscience of many of those people whose religious beliefs will not allow them to support socialism.
    
    

15. Why would the Blackburn clauses merely have whitewashed the Red objective?

    Because they would not limit the operation of the socialisation objective although at first glance they appear to do so.  The truth is that the test of exploitation which is set out in the Blackburn resolution would not exclude from the Red objective any private property used as "instruments of production".

    No private property used in industry, production, distribution and exchange would be immune from socialisation if Labor applied the test of exploitation.

    
    

16. Why would the Blackburn clauses exclude no private property used as "instruments of production"?

    Because, according to Labor's viewpoint: --

    1. All private property used as "instruments of production" is used for private profit-making.
    2. All private profit-making is exploitation.
    
    

    So all private property used as "instruments of production" is used for exploitation and must therefore be socialised.

    At the 1921 A.L.P. Conference, when the Blackburn resolution was under discussion, Mr. MacNamara, a Victorian delegate, said: --

    "It was very difficult nowadays to say what line of private ownership was not some form of exploitation. ... Even if the farmer was only working for himself and producing, he was exploiting unintentionally through the land values."

    At the same Conference Mr. E.J. Theodore said: --

    "If a man used his own farm, even though he did not utilise labor, he produced for profit."

    Mr. Yates added: --

    "The words 'socialisation of industry, production, distribution and exchange' meant the elimination of all forms of profit-making."

    
    

17. So if the Blackburn resolution had been operative the Red objective would not have been less total?

    That is so -- the whitewashing would have made it appear a pale pink.

    The Blackburn resolution doesn't actually make Labor's totalitarian objective into one of partial socialisation.

    The Blackburn resolution doesn't protect any profit-making private property from being taken over by the State.

    
    

18. Wouldn't the Blackburn Clauses protect the small man from operation of the socialisation objective?

    The Blackburn clauses would not protect from the Red objective the small manufacturer, the small shopkeeper, the small farmer.

    All industrialists and all producers would be liable to have their enterprises taken over by the State even if the Blackburn resolution had been effective.

    Labor says any person who uses his own property in making profit is an exploiter and therefore meet for the socialist axe.

    
    

19. Has the Red objective ever been altered?

    No.  Labor has again and again reaffirmed the Red objective and still subscribes to it.

    1. The Australasian Council of Trades Unions (A.C.T.U.) in 1928 at its inaugural meeting unanimously accepted the Red objective as its only objective.

       Ever since its forerunner, the All Australian Trades Union Conference (A.A.T.U.) embraced the Red objective in June, 1921, and took steps to see that it was accepted by the 1921 A.L.P. Conference, the A.C.T.U. has been continuously dictating to the A.L.P.

    2. Since 1921 all State branches of the A.L.P. have scrapped their old real Australian objectives and made the Red objective their only objective.

    3. Triennial conferences of the A.L.P. again and again have reaffirmed the Red objective and have resisted a few attempts to have it modified.

    
    

20. When did Labor last reaffirm its Red objective at a Conference empowered to alter the Constitution?

    In September, 1948, at the Triennial Federal Conference of the A.L.P. at Canberra.  Only at a Federal Conference of the A.L.P. can Labor's constitution be altered.

    At the 1948 Conference an attempt was made to camouflage the Red objective but it failed, and the Red objective was reaffirmed unanimously as Labor's one and only objective.

    
    

21. What attempt was made at the 1948 A.L.P. Conference to camouflage the Red objective?

    Delegates from South Australia dug up the Blackburn corpse and moved to have it accepted by the Conference as a real live part of the Red objective.  They hurriedly returned it to its grave because of the hostility shown to them by the Conference.

    What happened to the Blackburn interpretation at this Conference is significantly described by Dr. Rumble, the eminent Catholic radio commentator, in these words: --

    "As regards the Triennial Conference in Canberra, 1948, according to the official report the chairman ruled that the 'interpretation could be' reaffirmed;  but it was Mr. Clarey who said it 'still stood'.  And Mr. Clarey's statement was made the excuse for withdrawing the motion urging reaffirmation.

    "But, strangely enough, Mr. Clarey, who opposed the reaffirmation of the Blackburn interpretation on the excuse that it still stood, had previously moved the reaffirmation of the objective, viz., 'The Socialisation of Industry, Distribution and Exchange', though all knew quite well that that still stood -- a motion carried unanimously!  Are doubts raised by such difference of treatment unreasonable?"

    -- (Catholic Weekly, September 1, 1949.)

    The fact which Labor cannot explain away and which shows that it is still wedded to total socialisation is that the 1948 Federal Conference of the A.L.P. reaffirmed the Red objective, but made no attempt to make the Blackburn interpretation a vital part of Labor's objective and platform.

    
    

22. Has any attempt been made since September, 1948 to make Labor's Red objective appear as though it were only pink?

    Yes, many Labor leaders have said that the socialisation objective merely gives the Party the power to pick and choose the free enterprise concerns it will socialise.  They have asserted that the Red objective is not all-inclusive.

    Some Labor leaders have claimed that the Blackburn interpretation is Labor's official interpretation.  Mr. Calwell, Minister for Immigration, in a letter to the Catholic Press, has made this claim.  He has said that the Blackburn resolution "was as much a part of the official Policy of the Party as the original socialisation plank itself." (September, 1949).  That statement is simply not true.  (See Question 13).

    Mr. Chifley has said: --

    "It is not the objective of the Labor Party to go around socialising everything." (October 5, 1949).

    But Labor is committed to abolish all private profit-making and Mr. Chifley is pledged to socialise "everything guilty of that shocking 'crime'." (See Questions 16, 17 and 18).

    
    

23. But has any Labor leader authority to interpret the Red objective?

    No, not even the Prime Minister.

    All Labor leaders are bound to accept the decisions of the Triennial Conference of the A.L.P.

    
    

24. Hasn't the Federal Executive of the A.L.P. recently said that the Blackburn clauses are the official interpretation of the socialisation objective?

    It has.

    The Federal Executive has tried frantically, but unsuccessfully, to make it appear that the Blackburn resolution is part of the Party's platform and that it actually waters down the socialisation objective.

    Ever since the 1948 Conference said the Blackburn resolution "still stood", which means "still remains as a lost motion", many Labor supporters who cannot reconcile total socialisation with their religious views have goaded on the Federal Executive to declare that Labor believes in only a little bit of socialism.  The Executive has "obliged".

    
    

25. Has the Federal Executive of the A.L.P. any authority to interpret or modify the socialisation objective?

    It has no such authority.  No power to interpret, limit, add to or subtract from the Party's objective is conferred on the Federal Executive by the "Federal Executive Rules" printed on pages 60 and 61 of the Official Report of the 1948 Triennial Conference of the A.L.P.

    No mention is made in the Federal Executive Rules of the socialisation objective but much is said about the Party's platform.  Labor always distinguishes clearly between its objective and its platform and policy.

    The executive appears to have powers to decide "all questions involving an interpretation of the Platform of the Party" but no power to decide questions involving interpretation of the objective.

    
    

26. What precisely has the Federal Executive of the A.L.P. said about the Blackburn resolution?

    Referring to the Blackburn resolution, the Federal Executive has resolved "that the 1921 declaration still stands" (Labor Call, October 14, 1949).

    "Still stands", in this resolution, can have only one meaning.  It can mean only that the Blackburn resolution "stands" where it stood in 1921 -- a lost motion.  (See Question 12).

    In 1921 the Blackburn resolution "stood" outside the Labor Party's platform and in no way affected the Party's objective;  in October, 1949, it "still stands" outside the Party's platform and in no way affects the Party's objective.

    Until a Federal Conference says otherwise the Blackburn resolution will always "stand" outside the Party's platform and will not have the slightest effect on the socialisation objective.

    
    

27. So the Federal Executive of the A.L.P. cannot alter any decision of the Federal Conference of the A.L.P. dealing with Labor's objective?

    That is so.  But what is more, the Executive cannot alter any decision of the Federal Conference about any matter whatsoever.

    This is proved conclusively by Rule 5 (i) of the "Federal Executive Rules", which runs:

    The Federal Executive shall --

    "Have plenary powers to deal with and decide any matter which, in the opinion of at least seven members of the Executive, affects the general welfare of the Labor Movement, provided that no 'decision of Federal Conference shall be abrogated' under this rule.  The Executive decision upon such matter shall be binding upon all members of the A.L.P., provided that any Branch or person affected shall have the right to appeal to next Federal Conference against such decision."

    
    

28. What the 1948 Triennial Conference of the A.L.P. said about the Blackburn resolution therefore hasn't been overridden by the Federal Executive, is that so?

    Yes.  Remember that the rule says "no decision of the Federal Conference shall be abrogated" by the Executive.

    Apart from any rule, it is just too absurd to suggest that there can be any real meaning in the Federal Executive declaring the Blackburn resolution operative when the Federal Conference has just left it in the inoperative condition in which it was placed by the 1921 Conference.

    No socialist leopard in the short space of 12 months has ever changed its 28 years' old Communist spots.

    Even if the socialist leopard by a miracle did change its spots it would still be a leopard seeking stealthily to gobble up the makers of private profit, great and small.

    
    

29. But even if the Federal Executive's decision on the Blackburn resolution did override the Federal Conference's decision would that make the Red objective less total?

    No, not in the slightest degree.

    Even if the Executive had the power over the heads of the Conference to make the Blackburn resolution fully operative, the threat of total socialisation contained in the Red objective would remain -- though clumsily disguised.

    
    

30. Suppose that Labor's Federal Executive has really modified the Red objective?  Does that finally dispose of the matter?

    No, not by any means.

    According to Rule 5(i) the Executive's decision has to run the gauntlet of the next Triennial Conference in 1951.

    At best the Executive's alleged "modification" can be held to be a binding promise only until about September, 1951.  But if a Labor Government were elected in December, 1949, it would hold office normally until about February or March of 1953.

    
    

31. Would the next A.L.P. Triennial Conference be likely to reject the Executive's alleged "Modification" of the Red objective?

    Yes.  Most likely.

    Remember that only a year ago the Conference rejected an attempt to modify Labor's objective.

    
    

32. Why has the Federal Executive of the A.L.P. tried to make the Red objective look so respectable?

    The answer is just too obvious -- an election is pending.

---

SOCIALIST-LABOR AND COMMUNIST-SOCIALISTS ARE BOTH AIMING AT THE TAKING OVER BY THE STATE OF ALL THE PRIVATE PROPERTY USED IN INDUSTRY, PRODUCTION, DISTRIBUTION AND EXCHANGE.

A SOCIALIST AUTHORITY SAYS: --

"The co-ordination of economic activity must be greater and interference with private property as unlimited as it was in Russia if adequate planning is to be carried out."

-- Dr, Lloyd Ross, former Secretary of the Australian Railway
Workers' Union and now Public Relations Officer, Department of
Post-War Reconstruction, in "National Economic Planning", p. 141.

A COMMUNIST AUTHORITY SAYS: --

"Socialism and Communism are not separate systems but two stages in the one inevitable historical process.

"Socialism is the first or lower phase of Communism entered upon when the people have overcome the power of the capitalists and substituted common ownership for private capitalist ownership of the means of production."

-- The Australian "Tribune", 4th September, 1948.

WHAT DO YOU SAY?

---

The test of exploitation contained in the Blackburn resolution doesn't make the Red objective less total.

Why?  The argument in summary form is this: --

1. The Blackburn resolution says: --

   Only the private property associated with exploitation is to be socialised.

2. Labor teaching says: --

   Exploitation arises when privately-owned means of production are used for profit-making.

3. But it is common knowledge that: --

   All privately-owned means of production are used for profit-making.

4. It follows that: --

   Labor cannot deny that it is bound by the Blackburn resolution to socialise all the privately-owned means of production.

WITH OR WITHOUT THE BLACKBURN RESOLUTION LABOR'S AIM IS TOTAL SOCIALISATION.

Are Banks Competitive Enough?

Vol. 6, No. 4

SUMMARY

There is an ongoing debate as to whether Australian banks are earning higher margins (or "spreads") than overseas banks between the interest rates paid to depositors and the rates charged on loans.  This debate really concerns whether deregulation has produced as much competition as expected.

Differences between countries' banking systems make it difficult to be conclusive about international differences in banks' margins, although there are some indicators that point to higher margins here.

Moreover, while the underlying profitability of major Australian banks is now not only lower than before deregulation but apparently close to the average for other companies, this does not necessarily mean that the increase in competition has been adequate.  There is some evidence that the cost of providing bank services is higher than necessary and that deficiencies in the competitive framework are inhibiting the competing away of such excess costs.

The apparent inadequacy of competition is importantly a product of government regulation and government involvement in the industry, including excessive "prudential" regulation, the existence of government-owned and guaranteed banks, and the protection of existing major banks against take-over.

There may be a case for a new "Campbell Committee" report to assess these (and other) factors inhibiting competition in the banking industry and what might be done to change them.  A reduction in the costs of financial intermediation would help encourage investment and generally improve the functioning of the economy.

INTRODUCTION

For some time now, the House of Representatives Standing Committee on Banking, Finance and Public Administration has been investigating the "spread" (or margin) between banks' cost of funds and their lending rates, against the background of claims that Australian banks earn margins that are higher than overseas banks.  The main object of this investigation has been to assess these claims, the extent to which financial deregulation has resulted in additional competition and benefits to consumers, and whether such additional competition and benefits are judged to be adequate.  At the request of the Committee, I made a submission to it and this paper is an edited version of that submission.

At the outset, it is important to recognise that it is essential to a healthy banking system that banks earn returns on capital comparable with those in other industries.  Failure to do so will result in inadequate capitalisation of the banking industry, with potentially adverse prudential and efficiency consequences affecting the economy as a whole.  Banks thus need to earn an adequate "margin" of profit.

Further, competition is not limited to price.  Indeed, it is apparent that consumers have benefited from an increase in the range of services provided by banks.  However, the expectation would be that deregulation should also have led to some increase in price competition.

In its evidence to the Committee, the Australian Bankers' Association (ABA) appeared to suggest that the profitability of banks, rather than their interest margins, may be the best indicator of the state of competition in the banking industry, both domestically and in terms of international comparisons.  The ABA's submission to the Committee of 18 May included data showing a declining trend in banks' return on shareholders' funds, both over time and relative to other industries, and also showing that in 1991 Australian banks' profitability was not especially high compared to overseas countries.

Table 1:  Return on Shareholders' Funds (%)

	Banks	All company average
1980	15.3	12.2
1981	17.1	10.7
1982	15.6	9.0
1983	14.3	8.0
1984	15.8	9.5
1985	14.1	9.6
1986	11.4	10.8
1987	11.3	9.4
1988	12.6	10.2
1989	11.9	11.1
1990	9.8	9.0
1991	7.8	4.5
1992	-4.9	1.3

Source:  ABA Submission (from STATEX database)

There seems no doubt that the decline in banks' profitability in the early 1980s period of deregulation, and immediately after, did reflect increased competition and a move towards more "normal" or average returns on capital.  However, returns remained above "normal" up to 1989 and the reductions between 1989 and 1992 are not necessarily an indicator of increased competition since then.  Those reductions may simply reflect the effects of the recession and the resultant large increase in bad debts and non-performing loans.

Indeed, financial ratios derived from data in the ABA submission confirm that increased funding for bad and doubtful debts was the major factor in the recent decline in profitability (see Table 2).  These ratios also suggest that the 1993 figure for the return on average total assets was back to pre-1989 levels. ⁽¹⁾

Table 2:  Australian Banks -- Financial Ratios (%)

	1987	1988	1989	1990	1991	1992	1993
Interest income as a % of ATA	11.77	11.27	12.64	13.67	11.30	8.81	8.35
Interest expense as a % of ATA	9.66	8.82	10.10	11.32	9.07	647	5.41
Net-interest income as a % of ATA	2.15	2.50	2.56	2.46	2.35	2.41	2.93
Non-interest income as a % of ATA	2.67	2,03	2.05	2.19	2.23	2.37	1.56
Gross income as a % of ATA	4.82	4.95	523	5.17	4.59	4.83	4.49
Operating expenses as a % of ATA	3.59	3.46	3.82	3.88	3.40	3.14	2.92
Funding for bad and doubtful provisions as a % of ATA	0.25	0.32	0.84	1.11	0.94	0.81	0.46
Abnormal item as a % of ATA	0.00	0.03	-0.21	-0.77	-0.38	0.05	-0.06
Income tax as a % ol ATA	0.44	0.49	0.15	0.36	0.17	0.35	0.43
Profit after tax as a % of ATA	0.55	0.80	0.21	-0.96	-0.29	0.58	0.63

Source:  Australian Bankers Association

Note:  "ATA" = Average total assets

Data comparing net and "gross" interest spreads (gross spreads exclude the effects of interest on non-performing loans) also confirm that the loss of interest on non-performing loans was the main factor in the recent decline in profitability.  Thus, gross spreads have been relatively stable since 1982 (see Chart 1).

This indicates the need to examine not simply the trend in "margins" (of which "profitability" is one such) but the factors behind such trends.  Moreover, any international comparisons would need to examine developments over a period of time, as well as taking account of the extent of competition in overseas countries themselves.

There is also a question as to whether an assessment of profit margins can itself provide definitive conclusions in regard to the extent of price competition.  Given the need for banks to earn an adequate profit, the same profit margin, for example, may be the product of, on the one hand, high costs and high charges that reflect an oligopolistic situation which results in an inefficient use of resources and, on the other hand, low costs and low charges that reflect a more competitive market.  Clearly, the nation benefits if banking services of the same quality can be provided with resources equal to (say) only 5 per cent of GDP rather than (say) 6 per cent of GDP even though the banks' profit margin may be the same in each case.

In this regard it is noted that the managing director of Westpac Banking Corporation, Mr Robert Joss, was reported in the Australian Financial Review of 26 August 1993 as claiming that banks ought to be able to service their client base for $500 a head compared with the present cost of $700 a head, or $13 billion.  This implies that there could be potential for banks to reduce costs by up to 40 per cent or by $3.5-$4 billion, which compares with net interest income earned by the 4 major banks in the year ended September 1993 of just over $12 billion, or 3 per cent on average total assets.  If such cost reduction potential were to be realised, there would also be potential to reduce net interest income without reducing profit margins.

Accordingly, while the attachment examines the various definitions of margins and the trends therein, the main focus of this paper is on the factors affecting banks' costs and inhibiting the potential for reducing those costs.

INTERNATIONAL COMPARISONS OF MARGINS

A major influence in the debate on banks' margins has been evidence that Australian banks earn a bigger spread than some overseas banks between the interest they pay depositors and the interest they charge on loans.  However, all international comparisons have to be approached with considerable caution because of differences in circumstances between countries, and between industries in different countries.  This is certainly true in banking where there are significant differences between the structure of banking systems and the roles played by banks relative to other financial institutions and other parts of the capital market.  In particular, there are significant differences between banking systems in most European countries and the Australian system.

In his letter to the Committee of 14 December 1993, the Governor of the Reserve Bank argued that reliable data permitting international comparisons of bank margins "do not exist".  He noted that data compiled by Salomon Bros. and the OECD for 1990 showed Australia at the top in the Salomon Bros. figures but more in the middle of the field in the OECD figures.  He pointed out that the Salomon Bros. figures excluded bank bills from banks' assets and that, once adjusted for that omission, they were broadly similar to OECD figures.

However, the Governor's comments are not necessarily the end of the matter.  Indeed, the fact that the Reserve Bank is now assembling a detailed database on net interest spreads of banks in the OECD area, cross-classified by various attributes and dimensions of banking, indicates that it may be possible to develop international comparisons that will give a better indication of relative levels of competitiveness.

It is also evident that individual Australian banks are seeking to benchmark themselves against "international best practice", which implies that international comparisons are being made by those banks themselves.  Indeed, the major banks publish comparisons between their overseas and Australian operations.  While these overseas operations are relatively more involved in the wholesale market where spreads and margins are necessarily lower, the recent extent of these differences should be noted.

Table 3:  Interest Spreads and Margins -- Australian and Overseas Operations of Major Banks

		Half Year to Mar 94 %	Half Year to Sep 93 %	Half Year to Mar 93 %
National   Interest   Spread   Interest   Margin	Australia Overseas Australia Overseas	4.3 3.3 6.2 3.7	4.5 3.0 5.6 3.4	4.0 3.1 5.4 3.4
Westpac   Interest   Spread   Interest   Margin	Australia Overseas Australia Overseas	3.1 1.9 4.0 2.2	2.8 1.7 3.7 2.1	2.6 1.8 3.6 2.0
ANZ   Interest   Spread   Interest   Margin	Australia Overseas Australia Overseas	3.3 2.1 4.1 2.5	3.3 1.7 4.1 2.2	2.9 1.7 3.7 2.1

Note:  Interest spreads are after allowing for interest forgone on non-accrual loans.

It also seems clear that many of those involved in attempting to assess internationally the relative strength and profitability of Australian banks have concluded that their capacity to generate higher spreads is considerable.  In Moody's "Australian Banking System Study" of April 1994, for example, it is suggested that

The core earning capacity of major Australian banks is very good, primarily because of the broad net interest margin they can generate in their local market.  Australian banks' spread between cost of funds and yield on loans is high, even compared with those of other very profitable banking systems in the US, Canada, and the UK.

and

The banks' interest rate spreads in residential mortgages are also quite good.  Excluding a "teaser" rate with a term of one year, residential mortgages generate a spread that falls between 3 per cent and 4 per cent;  by comparison, the UK spreads in this area run 2 per cent, and in Canada, they have been between 2 per cent and 3 per cent.  The attractiveness of Australian residential mortgage spreads is magnified by the fact that losses associated with residential mortgages are minuscule and that residential mortgages only require half the regulatory capital needed to support a commercial loan.

Presently, the Australian banks' net interest margins are constrained because of the cost to fund a heavy load of bad loans.  This cost should ebb with the expected decline in non-performing assets.

INFLUENCES ON BANKS' COSTS

As noted, in considering whether competition in the banking industry is adequate, it is necessary to go beyond an examination of margins per se.  The following examines factors influencing banks' costs.

BANKS' BRANCH NETWORKS

Before deregulation, when there was little scope for competing on price, the major method of competing at the retail level was through a branch network.  This almost certainly led to the establishment of a considerable number of branches which were uneconomic but whose costs were able to be recovered either through "excess" spreads or by having higher lending and deposit rates than were necessary.  The existence of such an extensive network of branches at the time of deregulation undoubtedly made it more difficult for a new competitor to establish itself as, without undertaking a take-over, such a competitor faced the prospect of establishing a network of additional uneconomic branches and an extended and expensive price war to obtain market share. ⁽²⁾

With the development of new technology, and with the associated lesser reliance on the use of cash, it has become increasingly practicable and efficient to conduct "banking business" outside normal banking hours and outside bank branches.  Facilities such as ATMs, EFTPOS, Credit Cards and banking via telephone are examples.

However, even with these technological developments and the reduced physical contact required with banks, deregulation has been accompanied by little rationalisation of bank branches.  Indeed, the total number of bank branches has actually increased from 6,239 in 1983 to 7,064 in 1993 and the notional number of the Australian population "served" per branch has increased only fractionally (see Table 5 attached on Bank Branches and Population). ⁽³⁾  While this increase of 825 in total bank branches reflects the establishment of new banks (mainly those that were previously building societies, which now account for around 800 bank branches), the very small reduction in bank branches of the four major banks plus the State Bank of Victoria -- from 5,641 in 1983 to 5,468 in 1993 (about 3 per cent) -- is one indication that banks have not been under great competitive pressure to reduce costs.

The position of the Commonwealth Bank is particularly noteworthy in this regard:  since acquiring the State Bank of Victoria, the Commonwealth Bank appears to have reduced its total branches only from 1,791 to 1,756.  This failure of the Commonwealth to effect any substantive rationalisation of its branch network is relevant to the point made below about the adverse effects of government intervention in the banking industry.  Given the relative importance of the Commonwealth in the banking system, the fact that it has been inhibited in implementing efficiency measures has also had implications for the policies of other major banks.

OTHER COSTS

The foregoing is not to suggest that the major banks have not taken steps to improve productivity and reduce costs.  There has, in particular, been a substantial reduction in employees by the four major banks:  according to KPMG figures, between 1990 and 1993 their employees were cut by over 23,000 or almost 13 per cent (see attached Table 6 on Banking Employees, Productivity and Margins) and this figure has probably increased further since then. ⁽⁴⁾  However, this reduction may be more a reflection of the effects of recession and the increase in non-performing loans rather than of competition forcing a reduction in costs.  The saving from a 23,000 reduction in employees is probably of the order of $700-$900 million p.a., or only about 5-7 per cent to total operating expenses.

In the ABA submission to the Committee (page 9) it is suggested that the ratio of banks' operating expenses to operating income was reduced from 78 per cent in 1990 to around 62 per cent in 1993.  This contrasts, however, with KPMG figures indicating that the ratio in 1993 was not noticeably different from pre-recession levels (see attached Table 6 on Banking Employees, Productivity and Margins).  Further, even with the large reduction in employees of the four major banks plus the SBV, each employee of those banks was notionally "serving" fewer of the Australian population in 1993 than in 1983:  921 compared to 1,154;  that is, there is an implied reduction in productivity.

The ABA acknowledges "the need to make further cost and productivity improvements to achieve 'world best practice' " ⁽⁵⁾ and it is noted that there now appears to be a considerable difference between the best practice Australian bank (National) and other major banks (see attached Table 6 on Banking Employees, Productivity and Margins).  If the other 3 banks were to have achieved the same 1993 operating expense/operating income ratio as the National, their operating expenses would have been about $1.5 billion lower in total.  This lends weight to the comments by Mr Joss to which reference has already been made.

It is important in this context to recognise that the banks are operating within an industrial relations system which gives trade unions considerable capacity to resist or slow changes in work practices and which also gives unions greater capacity to obtain employee benefits from productivity improvements rather than to have such improvements reflected in lower costs for the benefit of bank customers/shareholders.  Without access to details of industrial negotiations between individual banks and the respective unions, and to details of wage increases and other changes consequential on award restructuring and enterprise bargaining, it is difficult for an outsider to assess the extent of the constraints under which banks operate.

Anecdotal evidence suggests, however, that they may be of not inconsiderable importance in slowing the process of improving efficiency of use of resources by the banking sector, particularly in circumstances where competitive pressures are reduced by other factors discussed below.  It is noted, in particular, that banks list the "willingness of employees to accept change" as an important factor in determining the pace and extent of reform and, while this is obviously a matter that banks have to take into account, it may be carrying more weight than is appropriate in the interests of improving efficiency.  It is surprising that neither the ABA ⁽⁶⁾ nor the Reserve Bank have referred to possible industrial relations constraints in their submissions to the committee.

GOVERNMENT REGULATION OF AND INTERVENTION IN THE BANKING INDUSTRY

There is no scope to examine in this Backgrounder the full extent of government regulation of, and intervention in, the banking industry and the implications of that for the extent of competition.  I suggest, however, that the effect of such government involvement is to restrict severely competition and to create a situation which provides reduced incentive for the major banks to effect structural changes.

By way of background, economic textbooks tell us that, to establish a perfectly contestable market, it is necessary to create conditions in which firms can enter and, if they choose, exit without losing the money they invested. ⁽⁷⁾  Such circumstances can ensure adequate competition because if higher than average returns are being earned on capital, new firms will enter and drive down prices to the point where "excess" profits are eliminated.  Alternatively, if "normal" returns are being earned but cost inefficiencies exist, new firms will enter and provide the same product at lower cost and lower prices.

The Australian banking industry more closely resembles an oligopoly than one where perfect contestability exists.  While new entry is possible, it is in practice very difficult for new entrants to become substantive participants by engaging in strong competition to obtain market share, without the risk of losing their capital or a substantial part of it.  A major reason for this is that the existing four major banks operate in an environment which is regulated with a view to protecting the depositors of existing banks.  Indeed, on one interpretation of statements by the present Governor of the Reserve Bank, it could be said that depositors have a de facto guarantee against loss.  Thus, while the previous Governor stated in 1985 that "the Banking Act is silent in regard to the priority to be given to depositors.  So the legislation is less than a guarantee to depositors of full repayment", ⁽⁸⁾ in the case of each press statement on the "runs" in 1990 on the Bank of Melbourne and Metway Bank, the present Governor indicated that the Reserve Bank would ensure that depositors are "fully protected". ⁽⁹⁾

The effect is to create a considerable degree of inertia amongst the customers of the respective banks such that it requires a major deterioration in the performance of an existing bank before there is a substantial switching of custom.  This situation inevitably operates to reduce the incentive for the banking industry to engage in competitive activity.  That reduced incentive is reinforced by the fact that the existing four major banks are operating in a market in which they are effectively protected under foreign investment policy from take-over by a major foreign bank (this would be deemed against the national interest), as well as being effectively protected under domestic competition policy from take-over by each other.  In any event, the prohibition under the Banks (Shareholding) Act against any one shareholder holding more than 14.99 per cent of the capital of an Australian bank makes it difficult for a take-over to be mounted other than by a bid mounted from a minority shareholding position and involving a very substantial outlay of capital.  This also means that existing boards and managements of the major banks are protected against removal by dissident shareholders except in unusual circumstances.

The foregoing combination of circumstances produces the situation, not uncommon in an oligopoly, where tacit collusion tends to occur, so that a follow-the-leader type approach tends to develop in both pricing and the introduction of new products.  This reflects the fact that for any one bank to try to obtain an increase in market share through a deliberate strategy of stepped-up and sustained competition would almost certainly require a major and extended programme of price competition that would be extremely costly and which might have only limited success.  In those circumstances the alternative of continuing to earn normal profits and not upsetting the apple cart is a relatively attractive one.

GOVERNMENT-OWNED AND GUARANTEED BANKS

Another important way in which government involvement in the banking industry affects competitive conditions is through the ownership of banks and the provision of specific guarantees for depositors of those banks.  In addition to the banks still owned and operated by the States of NSW, South Australia, Western Australia and Tasmania, the Commonwealth Government holds a majority interest in the Commonwealth Bank and it has included a specific guarantee in legislation passed (ironically) with the avowed intention of modernising the Bank so that it could compete in a deregulated market.  As at 30 June 1993 these government-owned and -operated banks with specific government-backed guarantees accounted for 28.5 per cent of total $A assets of the banking system.

As with most other government-owned and -operated enterprises, these banks have a history of operating with higher cost structures and paying less attention to return on capital than the private sector banks.  The Commonwealth Bank has, as already noted, a very large branch network and it is the bank with the largest $A assets.

It is evident that these banks have, at least up until very recently, operated with a significant political "brief", albeit rarely specifically stated publicly.  Their political masters tended to encourage or condone activities which were uneconomic but whose cost was borne by the taxpayer in the form of lower returns to Consolidated Revenue on assets employed.  Governments have also, at least until recently, been able to avoid proper capitalisation by relying on the government guarantee as a substitute for capital.

The existence of a situation where a substantial proportion of the assets of the banking industry has been operated under a government guarantee, but with less concern regarding returns, has clearly reduced the capacity for the other major banks to engage in active competition.  The government banks could more afford, in a sense, to be "loss leaders" as the lower returns would not necessarily affect their standing.  While the "loss leader" behaviour of some State Banks in the late 1980s eventually got them into serious trouble, their activities also had flow-through implications for the behaviour of other banks.

MONETARY POLICY

An important element of the banking industry's operations is the assessment of risk and the appropriate risk margins to be applied to the provision of finance to individuals and companies.  This margin will obviously be affected both by past experience with the operation of monetary policy and by the banks' assessment of the capacity of the monetary authorities to operate policy in the future so as to reduce fluctuations in the economy and, in consequence, also to reduce bad debts and non-performing loans.

In this regard, there can be little doubt that the extremely poor performance of the authorities in the operation of monetary policy in the 1980s has added to risk margins and to the costs of financial intermediation generally.  (It is also true that monetary policy was asked to bear too much of the burden of keeping domestic spending within reasonable bounds.)  Of course, through an excessive easing in the criteria for assessing credit-worthiness the banks themselves were partly to blame for the problems which emerged.  However, there remains a need for the authorities to make an unequivocal commitment to the maintenance of low inflation as the primary goal of monetary policy and to provide clearly and unequivocally for the operation of policy to be free of political interference.

CONCLUSION

There is no doubt that the removal of most controls over price and quantity in the banking industry ⁽¹⁰⁾ has led to increased competition which has resulted in some reduction in the profitability of the banking industry, and some reduction in (gross) interest spreads, by comparison with the pre-deregulation period.  Abstracting from the recession-induced increase in bad debts and non-performing loans, the reduction in profitability does not appear, however, to have led to below-"normal" returns and the industry has continued to be able to raise substantial amounts of capital from the market.  This capacity, of course, is important to the ongoing health of the industry and the financial system generally.

The question remains whether the increase in competition has reduced the cost of financial intermediation to the extent that might be expected in a so-called deregulated market.  Such cost reductions need not, of course, have any effect one way or another on profit margins or even interest spreads.  At a minimum, one might have expected that a deregulated market would have resulted in some narrowing of gross interest spreads in the post-1982 period and a much greater emphasis on charging for banking transactions.  This has not happened.

My assessment, which must of necessity involve a considerable judgemental component, is that the reduction in costs has also been much less than it should have been, with the result that Australia remains "over-banked" and has more resources than it should in the industry.  This situation exists primarily because of the very substantial degree of regulation of the industry, the large direct government involvement in the industry, and the provision of specific government guarantees to government-owned banks.  Australia's industrial relations system and the preferential position given to trade unions have also probably inhibited cost-reducing reforms.

To the extent that government regulation involves prudential requirements dealing with capital adequacy and the like, the Australian industry is in a similar position to its counterparts overseas and there may be only limited scope to reduce such regulation so as to increase the potential for competitive forces to operate in the industry.  Even so, there appears to be scope for basing government regulation more on underpinning the financial system and acknowledging that individual banks and even their depositors should have the potential to experience losses.  The risk of "contagion" is overstated.  Provided the central bank ensures an adequate supply of liquidity for the system as a whole, situations where individual financial institutions experience serious difficulties should be capable of being handled by allowing such institutions to be taken over without threatening the financial system as a whole.  Moreover, the extensive regulation of entry and takeover warrants careful review.  For example, the objective of the Banks (Shareholding) Act limit on ownership by an individual/company might better be met by relying on the prudential requirement limiting the proportion of a bank's lending to one individual or company.  Equally, it may be that, rather than reducing competition, allowing a take-over of an existing major bank by another major bank or even a foreign bank might actually lead to increased competition for market share, as well as for improved management.

The privatisation of the government-owned banks, and the removal of their government guarantee, would also help create level playing field conditions that are more likely to be conducive to competition to reduce costs.

There may be a case for a new "Campbell Committee" report to assess these various factors inhibiting competition in the banking industry and what might be done to change them.  Such a Committee could take the opportunity to review the increased regulation and supervision of financial institutions since the 1980s, which has been based on the accepted wisdom that the over-borrowing and over-lending that occurred in the 1980s could have been prevented by greater regulation, and a failure to recognise that the heart of the problem lay with the inadequacies of monetary policy.

ATTACHMENT -- BANK INTEREST MARGINS

Confusion often arises because, while there is a variety of possible definitions of bank interest "margins", commentators frequently do not make it clear which margin they are talking about.  Moreover, some comparisons which are made are inappropriate.  It is not, for example, meaningful to compare the interest rate on a selected deposit and a selected loan product as banks' funds come, in effect, from a general pool.

However, it may be possible to draw some conclusions from the margin between the average total interest rate paid by banks and the average rate on a selected loan product.  For example, the fact that after the de-control of new housing lending in 1986 the margin of around 4 per cent for the major banks between average housing rates and the average total interest rate paid did not fall prior to 1992-93 suggests inadequate competition, given the relatively low risk on housing loans. ⁽¹¹⁾  Since 1992-93 the availability of a lower fixed rate for the first year of a housing loan (which reportedly now constitute about half of new housing loans) has somewhat reduced the average margin on housing loans (see Chart 2 on Housing Margins). ⁽¹²⁾  This recent development is obviously a reflection of greater competition amongst financial institutions lending for housing, recently highlighted by the entry into the home mortgage market of National Mutual and the ACTU.  However, this burst of competition emerged at a time when the demand for other loans from banks was very weak and it remains to be seen whether it is sustained.  Moreover, the new fixed-rate bank loans would constitute only a small proportion of banks' total outstanding housing loans.

Comparisons between the average total interest rate paid and average rates on selected loan products may thus provide some indication of the extent of competition.  It is understood that banks argue that this is not necessarily the case and that, in determining rates for particular products, regard is paid by them simply to conditions in the market for that product.  However, while very competitive conditions in the market for a particular product may dominate in the short term, beyond the short term regard must obviously be paid to the average cost of funds and the margin thereon.  If the margin is too low to be sustained given overall profitability objectives, banks will have to increase the margin or take other compensatory action.

In fact, one of the tests of whether there is effective competition is whether attempts are being made to reduce margins on particular products.  In a competitive market the margin between banks' average cost of funds and their lending rates on various products should constantly be subjected to competitive assessments in the light of possible changes in risk and technology, and to attempts by individual institutions (both within and outside the banking sector) to acquire market share of one particular product or another.

It is also important to note that changes in the margin on a particular product may reflect the elimination of cross-subsidies which existed in a previously regulated market.  The narrowing of margins on large business loans, and the widening of margins on small business loans, are good examples of this phenomenon.

Comment is also sometimes directed to the margin represented by the additional interest payable over the reference rate published by a bank for a variable loan product.  This margin reflects the banks' assessments of the relative riskiness of individual borrowers for a particular loan product and is not therefore necessarily an indicator of the state of competition.  It is noted in this regard, however, that the range of margins as between smaller and larger businesses in the ABA submission appears, on the surface, surprisingly small (see Table 4 below).

Table 4:  Weighted Average Interest Rates, December 1993 (per cent)

	Smaller Business			Larger Business			All Business
	Under $10,000	$100,000 to $500,000	Average	$500,000 to $2m	Over $2m	Average	Average
Variable rate loans	11.1	10.7	10.9	10.3	9.8	10.0	10.5
Fixed rate loans	10.4	9.7	10.0	9.7	8.3	8.7	9.2
Bill Facilities	8.3	8.2	8.2	7.9	6.6	6.9	7.2

Source:  ABA Submission

It could be, of course, that larger businesses are still cross-subsidising smaller ones to some extent, as was the case before financial deregulation.  However, given the considerable potential for larger businesses now to go direct to the market for funds, it seems unlikely that any remaining cross-subsidisation is significant.  A possible alternative explanation might be that the narrowness of the margin range is an indication of inadequate competition in lending to smaller businesses, so that the riskier propositions are not accommodated.

Another margin used by analysts is the difference between interest received and interest paid as a proportion of total assets.  Table 2 shows the trend in this margin between 1987 and 1993.  However, while it may be useful to examine changes in this margin over a short period, the potential for the composition of assets to shift as a result of changes in capital or off-balance sheet transactions (such as bills) may cause this margin to vary over time for reasons unconnected with profitability.  It is, again, not necessarily a good indicator of competition.

Perhaps the most accurate indicator of the extent of competitive pressures is the difference between the average total interest received and the average total interest paid.  This margin is usually known as the interest "spread".

However, as it does not include income from fees and charges, it is possible that any change in the interest spread, or any absence of change, could be offset by a relatively higher or lower proportion of income coming from fees and charges.  A comprehensive assessment of changes in competitive pressures would thus need to include an assessment of changes in fees and charges as well as in net interest spread on the income side.

It is noted that the "gross" interest spread (that is, the net spread plus interest on non-performing loans) has been relatively stable since 1982, although there has been a relatively small reduction by comparison with the pre-1982 period (see Chart 1 on Domestic Interest Spreads).  Prima facie, one might have expected, in the more deregulated environment since 1982, some narrowing of this spread and, to the extent that this was reducing profits below normal rates, a compensating adjustment elsewhere, such as through increased income from fees or reductions in net operating costs.  There is also a question as to whether the much lower level of inflation might be expected to have reduced the nominal spread.

Of course, banks point out that there have been factors (such as the removal of controls on rates for "new" housing loans, the "loss" of a substantial volume of non-interest bearing deposits, and the "take-over" by them of riskier customers of finance companies) which have either added to costs or removed an artificial barrier on charges and have therefore tended to "push" margins higher.

However, it could equally be pointed out that deregulation should have reduced margins on, for example, large business loans.  More generally, if margins have tended to widen in some areas as a result of deregulation they should have tended to narrow in other areas unless the industry is in a position to establish higher-than-average overall profitability.  It is submitted that whatever may have happened in the case of the market for some particular products does not deny the general proposition that overall gross spreads should have narrowed.

* * *

This Backgrounder is a slightly edited version of our submission on bank interest margins to the House of Representatives Standing Committee on Banking, Finance and Public Administration.

ATTACHMENT

Table 5:  Bank Branches and Population

Branches
Major Banks		1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993
ANZ		965	972	990	1109	1105	1092	n.a.	1092	1094	1260	1209
CBA		1025	1019	1015	999	937	971	n.a.	936	1813	1806	1756
		(1287)	(1280)	(1278)	(1277)	(1273)	(1272)	(1261)	(1258)
WBC		1530	1389	1330	1315	1306	1281	n.a.	1301	1301	1299	1255
NAB		1314	1321	1243	1331	1286	1280	n.a.	1286	1273	1261	124S
SBV		545	547	538	532	533	534	n.a.	533	-	-	-
Total		5379	5248	5116	5286	5217	5158	n.a.	5148	5481	5626	5468
		(5641)	(5509)	(5379)	(5564)	(5563)	(5459)	n.a.	(5470)
Other Banks		1143	1130	1320	1446	1639	1697	n.a.	1960	1436	1294	1596
Total		5977	5831	5898	620O	6323	6321	n.a.	6575	6917	6920	7064
			(6239)	(6092)	(6161)	(6478)	(6609)	(6622)	n.a.	(6897)
Population
		1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993
Total (000s)		15394	15579	15768	16018	16264	16532	16614	17065	17284	17483	17622
Branches per Million		(405)	(391)	(390)	(404)	(406)	(400)		(404)	40O	396	401
Population Per Branch	Total	2576	2672	2677	2584	2572	2615		2595	2499	2526	2495
		(2467)	(2557)	(2562)	(2473)	(2461)	(2497)		(2474)
	ANZ	15952	16027	15947	14443	14718	14961		15627	15798	13875	14575
	CBA	13613	15288	15554	16034	16478	17025		18231	9533	9680	10035
		(11961)	(12171)	(12354)	(12543)	(12776)	(12997)		(13565)
	WBC	10061	11215	11870	12180	12453	12905		13116	13285	13458	14041
	NAB	11715	11793	12701	12034	12646	12915		13269	13577	13864	14120
	SBV	28245	28480	29345	30109	30514	30958		32016
	Others	13468	13786	11960	11077	9231	9741		8706	12036	13510	11041

Source:  ABS and Reserve Bank.  Figures in brackets for CBA are supplied by CBA and include "sub branches or service centres" wnich did not have lending facilities.

Table 6:  Banking Employees, Productivity and Margins

Employees
	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993
ANZ	25951	36789	38031	39018	41187	42445	44023	48182	46261	43977	41737
CBC	31713	35043	36853	37495	31388	35109	37114	37957	48267	45790	42329
NAB	22137	22474	20540	21060	24333	34645	34695	40997	39911	38377	43053
WBC	34285	35556	37635	37876	37282	46506	44925	45395	42431	39253	33724
SBV	7500	7766	7834	9270	10714	10372	11253	11496
Total	121626	137628	140890	144719	144904	169077	172010	184027	176870	167397	160843
Productivity (Operating Expenses/Operating Income)
				1986	1987	1988	1989	1990	1991	1992	1993
ANZ				74.2	67.1	70.8	73.3	72.2	67.6	73.0	74.6
CBC				75.4	80.1	71.3	67.7	61.7	50.9	67.7	71.9
NAB				69.6	68.3	66.6	61.5	58.2	58.4	60.8	58.6
WBC				74.2	72.2	66.1	72.0	59.2	59.9	82.0	66.1
Total				73.3	71.6	68.6	68.8	62.7	59.1	70.5	67.0
All Banks					72.2	69.7	61.7	64.9	61.4	70.8	66.5
					(3.2)	(3.3)	(3.1)	(3.1}	(3.1)	(3.3)	(3.1)
Productivity -- Operating Income Per Employee
							1989	1990	1991	1992	1993
ANZ							83	91	100	101	104
CSC							74	89	119	99	99
NAB							100	123	126	136	152
WBC							87	114	124	113	122
Total							86	104	117	112	119
Net Interest Income/Average Total Assets
			1985	1986	1987	1988	1989	1990	1991	1992	1993
ANZ			3.14	2.81	2.65	2.92	2.96	2.65	2.63	2.44	2.53
CBC			3.62	3.83	3.56	4.00	3.89	3.74	3.79	3.68	3.37
NAB			3.03	2.87	3.09	4.21	3.84	3.79	3.78	3.66	3.72
WBC			3.74	3.52	3.52	3.44	2.97	2.93	2.00	2.38	2.44
Total			3.38	3.25	3.21	3.64	3.34	3.22	3.18	3.00	3.01

Source:  KPMG Peat Marwick -- Various annual surveys of the performance of financial institutions.  Figures in brackets are for operating expenses as a proportion of average total assets.

---

ENDNOTES

1.  However, the 1994 Financial Institutions Performance Survey by KPMG shows that the 1993 return on net assets was still lower than pre-1989 levels.

2.  Of course, a number of new banks have been established with retail branch networks.  However, most of these have been conversions from building societies.  The new foreign banks have fewer than 100 branches between them and hold only about 10 per cent of total $A assets of the banking system.

3.  Using the bracketed figures for the pre-1990 period.

4.  It is noted that the ABA submission of 17 May 1994 refers to a reduction of 31,500 since 1990 for all banks.

5.  Evidence to Committee, 18 May 1964, page 62.

6.  It is understood, however, that the ABA itself has no responsibility for industrial relations, which is handled by individual banks.

7.  Unlike a perfectly competitive market, a perfectly contestable market does not require, therefore, a considerable number of sizeable participants.

8.  "The Prudential Supervision of Banks" by R.A. Johnston, RBA Bulletin, March 1985.

9.  See press statements by the Governor of 16 July 1990 and 3 October 1990.

10.  A control still exists on interest rates on "old" (pre-1986) housing loans.

11.  Some initial increase in the margin on housing loans after decontrol was to be expected, of course.

12.  The average margin shown in Chart 2 for 1992-93 is that for variable rate housing loans only.  The shaded section shows the average margin on fixed rate loans.

I Want my Viagra

With all the focus on gains from tax reform, it is easy to overlook the millions of dollars per annum of gains that the Government could deliver by reforming pharmaceutical regulations.  The delays in bringing Viagra to the Australian consumer amount to net losses in satisfaction to Australian consumers of over $20 million per month.  These losses can be multiplied many times over by the costs of delays from other drug approvals.

The price of Viagra is likely to be $15 per pop.  The true cost of delayed access is the "consumer surplus" which regulatory postponement denies to users.  The consumer surplus from Viagra -- the amount users would pay over and above the supplier's price -- will, of course, vary considerably.  Tales of Viagra organised expeditions of Japanese men to Hawaii indicate a willingness to pay on the part of some consumers of several hundred dollars.  And Australian men are no more lusty and no less aspirational than Japanese!

Assuming willingness to pay by the average Australian consumer is $25 above the market price, at an estimated 600,000 doses a month there is an annualised loss of "consumer satisfaction" of $21 million or $250 million on an annualised basis.

As a high profile innovation, Viagra's approval is being fast tracked.  But why duplicate the approval systems of other countries? While those conducting the reviews in Australia are doubtless well credentialled, they can claim no superiority over those who conducted the reviews in the US.  And in the final analysis, pharmaceutical businesses have massive incentives to avoid harming customers in our increasingly litigious age.

There are dozens of new pharmaceuticals offered each year.  On top of this are similar numbers of agricultural and other chemicals.  Each one's review involves experts poring over 100,000 pages of data.  Having similarly trained experts of several countries each examine the same data is duplication and waste additional to that created by approval delays.

On average, Australians gain access to new drugs some 18 months after they have been first approved in an OECD country.  Some improvements have been made following the Baume Report in 1991 which resulted in the average evaluation time falling from 44 months.  But Australia could make considerable savings by "free riding" on other countries' approval processes.

The Baume Report stopped short of advocating automatic approval where this had been given in selected overseas countries.  It saw this as leading to a loss of skill levels in Australia.  This seems much more like protection of highly educated Australian academics.  Establishing income support under the guise of health based regulatory controls is the sort of inefficiency that the micro-economic reform process seeks to combat.  We would be much better off retaining these skills by sending people on sabbaticals to overseas evaluatory agencies.  At least then we would get some kind of fix on the precise costs borne by the community.

We of the "Baby-boomer Me-generation" now hold the levers of political and administrative power.  We are also likely to be the main source of demand for Viagra's staying power.  But only an optimist would forecast that our vested interest in obtaining early access to Viagra would provide the catalyst for reform of the pharmaceutical approval system.  The more likely outcome is that vested interests will prevail with the continuation of time consuming processes that ensure influence for domestic administrators and valued consultancy contracts for Australian assessors.

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Take a hint from our trans-Tasman cousins

THE 1994-95 New Zealand Budget, brought down on 30 June, produced a spate of comparative analyses that put the Budget of the Australian Treasurer, Ralph Willis, to shame.  Surprisingly, however, these analyses did not bring out the most important point:  that the New Zealand strategy has put the country on a much more sustainable growth path.

In particular, New Zealand is making a great deal more room for its private sector to expand over the next three years by providing for Government expenditure to fall by 1996-97 to 31 per cent of GDP from 40 per cent in 1992-93;  and by providing for the Budget surplus to be as high as 4.6 per cent of GDP in that year, compared with a deficit of 2.3 per cent of GDP in 1992-93.  Yet this seemingly "deflationary" policy (in Keynesian terms) is confidently projected to achieve economic growth averaging nearly four per cent a year.

Such a growth rate is similar to that projected for the next three years for Australia in Mr Willis's Budget, but in per head terms New Zealand's growth would be faster and is more likely to be achieved.

By giving more room to the private sector to expand, New Zealand is less likely to have to cut back private-sector spending by increasing interest rates to keep inflation or the current account under control.

It also starts from a much better position on both these fronts, with inflation down to about one per cent a year and the current account now running a small surplus.

Almost as significant in terms of sustainability may be the passage of the Fiscal Responsibility Act, described as "an act to improve the conduct of fiscal policy".  This act is the idea of the former Finance Minister, Ruth Richardson, who, despite being "sacked" after the last election, nursed it through Parliament from the back bench.

She has since announced her resignation from Parliament, but she claims that the act "will do for fiscal policy what the Reserve Bank Act has done for monetary policy".

The act improves the potential, external shocks aside, for New Zealand to have sustained high economic growth.  Were that to occur, it would be good news for Australia as New Zealand is our fourth-biggest export market.  Yet when he visited Australia early last month, the New Zealand Prime Minister, Jim Bolger, was treated more like a country cousin.

What is the basis of Ruth Richardson's comment about the significance of the Fiscal Responsibility Act?  The short answer is that the act makes it more difficult for politicians to change fiscal policy purely to secure a short-term electoral advantage.  It does that in two main ways.  First, by legislating five principles of fiscal management, which include requirements to establish and maintain prudent levels of Government debt and net worth, and to pursue policies consistent with having stable and predictable tax rates.  Second, by requiring the Government to publish its fiscal strategy for the short, medium and longer terms three months before each financial year and the Treasury to publish at various times (including before each general election) economic and financial updates.

Of necessity, these principles are stated in terms that are open to differing interpretations, and nobody would be naive enough to imagine such legislation will guarantee fiscal discipline.  If the political culture is not conducive to such discipline, politicians will find ways of avoiding it.  New Zealand also has in prospect major changes in its electoral system which, at the next election, are likely to involve governments consisting of a coalition of two or more political parties.  This could make it more difficult to maintain discipline.

However, by having these principles and procedures on the legislative books, the "culture" will be influenced and politicians will have to be more open about the likely effects of change in budgetary policy, particularly over the often-forgotten medium to longer terms.  In economists' jargon, there will be greater "transparency".

The parallel in Australia is the procedure that has developed to publish before the annual Premiers' Conference the national fiscal outlook for the next three years.  This move is along similar lines to my proposal to have a federation budget but it has a good way to go before it subjects governments to the discipline and transparency that Ruth Richardson's initiative seems likely to do.  In the meantime, with the Victorian Opposition committing itself to responsible financial policies, the time may be ripe for a bipartisan Fiscal Responsibility Act in Victoria.

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