The last couple of weeks of political debate over the banks, and its accentuation in the wake of the Commonwealth Bank’s move to raise interest rates by double the increase in the Reserve Bank’s cash rate, has been an interesting one.
It should dispel any conception that the poverty and paucity of public debate in this country is because we talk about politics not policy. Or, rather, trouble the view, often expressed by Tim Dunlop among others, that the quality of debate would be automatically improved if there were more analysis of policy. (I hope that’s an accurate characterisation of the position – it might be a bit broad brush and lacking nuance, but that seems to me to be the gist of the claim.)
We’ve certainly had oodles of discussion about the politics of the banking stoush – whether it represents some sort of leadership positioning by Joe Hockey, whether Tony Abbott was trying to close him down or just uninformed and ignorant about the detail of Hockey’s position, whether Wayne Swan has been left out on a limb. And so on.
But there has also been a surfeit, perhaps a plethora, of articles on what policy initiatives might be taken to address a lack of banking competition, and its effects on interest rates, finance for small business, and that bit of the two speed economy which is not as flush as the resources bit.
Some – a small minority – have been sensible and well considered: for instance, Bernard Keane’s pieces in Crikey.
But the mainstream media has been full of numerous, in fact daily, op/ed and “analysis” pieces explaining why particular ideas for banking regulation are dastardly, and why all will fail. You can take your pick of the putatively more economically savvy or the, you know, world weary and disdainful tone adopted by David Burchell. In any case, it’s a daily feast.
The quintessential representation of this type of article is Arthur Sinodinos’ op/ed from Thursday. Sinodinos fails to mention that he’s employed by the National Australia Bank. He might also consider dropping his descriptors of Abbott as “Spartacus” and Julia Gillard as “La Gillardine”, which are, at best, well past their use by date.
Consider, as Paul Kelly might say, this sentence:
Spartacus has returned with a refreshed participation and productivity agenda that encompasses income tax cuts and welfare-to-work measures.
That’s by the by.
Sinodinos manages to slap down most suggestions for banking reform. In this, he’s not alone. Most of the articles I’ve gestured to have as their core thrust the claim that one particular proposed measure, or indeed any foreseeable measure to improve competition in the banking sector, is bad because (a) it is populism!; (b) it won’t work; (c) regulation is bad!… or some mixture of the above.
What we can see in all this is a number of fallacies which disguise the presence of fundamental political interests in policy discussion.
First, there’s the “regulation is bad” claim – which ignores the fact that banks are already highly regulated. To the degree that’s conceded, the argument becomes something along the lines of “there’s too much regulation already” and “this proposed regulation could have disastrous consequences”. Occasionally, the bank deposit guarantee is criticised, because, as we know, Labor regulation which apparently supports banks’ profits is automatically very bad indeed because it’s a sign of creeping interventionism, misguided “Old Labor” socialism, whatever.
Secondly, the anger directed at bankers is seen as being a function of bad presentation or deficient public relations, as in this piece by David Penberthy. Yet, by omission, if nothing else, the questionable nature of the key argument being put by Bank CEOs – that somehow, “everything changed” with the GFC and structural shifts imply a higher cost of funds is reported without question while the view of the Reserve Bank and Treasury that cost of funds is now at normal levels is downplayed or ignored.
Thirdly, and most crucially, the accusation of “populism” is deployed to suggest the illegitimacy of any possible measure which would do anything other than allow the banks to do pretty much whatever they like. It’s here that the contradictions of neo-liberal rhetoric and ideology are at their height: those who might in theory be in favour of competition are in practice against anything which can be represented as “anti-business” or suchlike.
Oligopolistic cartels can do as they please.
To some limited degree, there are weak gestures towards a re-signification of the populace as mini-capitalists (“don’t all those people complaining about their mortgages have bank shares in their Super?”), but the crux of the matter is the exercise of power of the privileged few against the many. Which, of course, is what populism was invented to counteract.
So, there you have it. A ton of policy debate in the media, but very little of it serving the public interest, as opposed to powerful private interests.
The major banks impose exit fees on borrowers seeking to change lending institutions.
In terms of the total income earned by banks these fees represent a tiny sliver.
Yet, the these fees represent a major infraction of the principle of the free flow of capital. These fees are far more than the costs of terminating loans. They are an active hindrance to borrowers seeking to reward institutions offering lower rates than their current lending institution.
Borrowers shifting from one institution to another should be a zero-sum game for the lending institutions. Yet, these lending institutions appear to resent the need to compete with each other on price. Instead, they seek to imprison their borrowers in financial vassalage.
Oh, why do the banks hate competition so?
Katz @ 1 – do you know if application fees for loans actually represent the real cost to the bank of a loan application? If they’re not I’m just wondering if exit fees are one way for the bank to ensure that they recover costs and make some profit before a new customer leaves.
After all exit fees are pretty common – eg internet access, mobile phone plans etc all commonly have early exit fees.
Or indeed structural issues in our society. The question should not be;
Q. Why are the banks so afraid of competition?
Rather:
Q. Why are so many people so dependent on financial institutions for their basic housing?
My loan is currentlt 6.83%, I expect it to increase to 7.08%. I don’t pay any anual fees or charges, and I won’t pay an exit fee if I pay out my loan early. If al you have is a housing or personal loan, you are a wage earner, and you only require one credit card to get you by in life. Join your local credit union. Banks are bastards, we all know that, so why do you stay in the relationship?
Steve1 @ 4 – well as a colleague of mine discovered the local credit unions can be quite a bit more conservative with their lending criteria. He was a great fan of his credit union until they refused him a home loan (specifically some temporary bridging finance whilst selling one house to buy another) and ended up having to go to a bank.
Exit fees are about $700.
I doubt that it costs $700 to do the paperwork required to terminate a loan.
There seems to be an assumption that massive profits – that show no sign of abating – are a good thing.
Massive profits are usually a sign of market failure of some kind or other.
Good bit of analysis (as always) from Steven Keen:
http://www.debtdeflation.com/blogs/2010/11/09/more-competition-or-less-debt/
so why do you stay in the relationship?
Why does anybody stay in an abusive relationship?
Robert Merkel @ #7 said:
Thats normally true for established industries where one would expect that barriers to entry would be low enough to allow super-profits to be competed away. The fact that the big four banks continue to rake in super-profits and have taken 95% of the mortgage market implies that barriers to entry for producers and exit for consumers are way too high.
The exception to the super-profits = uncompetitive rule being new industries where the first mover gets to reap windfall profits – a just reward for discovering greener pastures, IMHO.
Chris @5. All the banks are now wary of bridging loans. I read an article no more than a month ago saying that banks were no longer providing them.
Makes sense if your worried you invested in a bubble.
http://www.whocrashedtheeconomy.com/
This not the article I read but it’s eerily similar.
MB:
“It’s here that the contradictions of neo-liberal rhetoric and ideology are at their height: those who might in theory be in favour of competition are in practice against anything which can be represented as “anti-business” or suchlike.
Oligopolistic cartels can do as they please. ”
False in so many ways. Where is you eveidence that the banks are engaing in cartel activity? As far as I’m aware there is no current ACCC investigation.
It is also absurd to argue that all neoliberals oppose anti-cartel measures.
I’m happy interest rates went up. I’m with the Commonwealth Bank, so it’s even better for me.
Unlike all these irresponsible douchebags who borrowed far too much money and whine about minor increases in interest rates, I save money.
There are literally millions of other Australians like me who benefit from interest rate rises (Specially people living off their savings), but apparently only idiot homeowners who borrow far too much money are the only people in this country who matter.
Seriously, the interest rate went from very historically low to…. merely historically low…… THE HORROR OF IT ALL! PLEASE MAKE IT STOP!
Bobalot @14, apart from exposing yourself as a bit of an R sole, you fail to understand that the economy depends on some people saving money and some people borrowing money. Both should get a fair deal with ‘dependable’ interest rates and charges.
The problem is that the simple transaction of people with money being paid for the use of it by others is perverted by neoliberal governments using it to control inflation and greedy banks having far too much power as the middle men and gouging both parties for excessive profits.
In such an uncertain economic system it’s difficult for both investors and borrowers to plan ahead and especially when many of the borrowers are young and inexperienced.
Bobalot, the issue is not so much the level of interest rates, it’s the spread between what they pay for money, and what they charge for it, that’s the perceived problem.
Normally, competitive pressures are supposed to reduce such profit margins, but there’s evidence to suggest such pressures aren’t working in this specific case.
Mark, is this LP’s first thread about the bank story cycle that began with Hockey prematurely, if inexpertly, getting onto a very, very good thing before the Melbourne Cup rate rise?
Your analysis has left out a couple of salient process facts: it seems Xenophon’s skillful exploitation of the hung parliament was the reason for all this coming to our attention (before the CBA’s decision to gauge its customers, that is); and it’s Gillard/Swan Labor that has taken the lead in using anti-populist scare tactics in this debate.
I’m all for blowing open this subject, but c’mon, some perspective on just whom is currently the most powerful player here against an open debate. Their name begins with ‘Australian’ and ends with ‘Labor government’. No amount of political nostalgia or lambasting of the commentariat changes that. Sucks, I know.
I just looked at Burchilll’s article. He’s gone way beyond defending the local banks—he’s saying it’s wrong to criticise the foreign players who almost triggered Great Depression Two. Because it’s not aufait for Matt Taibbi to attack decent regular folk values, or something.
Also, can someone explain to me why CBA were able to buy 33% of John Symond’s Aussie Home Loans a couple of years ago (early 2008), and should it have been possible for Swannie to have nixed that takeover as a condition of the government deposit guarantee?
Bobalot, take a look at some of these charts before continuing your ignorant prattle.
Rates are very low, but house prices are very very high indeed – in fact, have never been higher. Thus, loans are much larger, making small movements bite more.
Also take a look at the very first chart, “household interest payments”, which would put paid to your notions of millions of Australians making hay from fabulous equity and savings.
Our whole banking system is seriously flawed.Banks are allowed to create new money in their computers to equal our increases in GDP and inflation.When keating sold off the Commonwealth bank,we lost serious capacity to create new money for infrastructure.Hence we borrow 30% of our mortage money from OS banks to buy our own land.These banks create this money in their computers anyway.What’s wrong with our computers?
http://secretofoz.com/
babalot might have been a bit intemperate but I can remember paying 17.5% on a mortgage. Never forgot the lesson.
Nowadays the fabric of the nation falls apart with a .25% rise.
@ Salient Green
I’m an R hole for pointing out that literally millions of Australians have been ignored in this debate and that people who are “doing it tough” from a minor interest rise shouldn’t have borrowed so much money in the first place?
This is called REALITY.
Do you have any actual evidence that banks are making obscene profits?
What is the rate of return on their assets these banks are getting? What is their actual rate of profit?
I hear a lot of whining but no evidence.
@ patrickg
Did you even look at these graphs?
The net interest-margin has been declining for almost a decade. They shot up during the GFC and now appear to be on the way down again.
The net interest margin that the banks were making were even higher in the year 2000 than they are now currently.
They show that finance is fairly profitable but not as profitable as mining. I didn’t hear newspapers and Joe Hockey crying blue murder over their gigantic profits. In fact, they fought tooth and nail to defend mining companies making billions off the collectively own resources of Australia.
I have to say that I’m glad I bought my current house when it was overpriced instead of ridiculously overpriced.
Unfortunately I still have a mortgage, but it’s affordable.
“Rates are very low, but house prices are very very high indeed – in fact, have never been higher. Thus, loans are much larger, making small movements bite more.”
No one forces you to pay gigantic amounts of money for a house. My family saved for 8 years in my childhood to put down a reasonable deposit on their first house.
If you take out such a large mortgage that even a tiny (and very predictable) rise in interest rates cripples your finances, then you are an idiot. There is nobody to blame but yourself.
“Also take a look at the very first chart, “household interest payments”, which would put paid to your notions of millions of Australians making hay from fabulous equity and savings.”
This is so silly, I just don’t where to begin. My statement is still correct. There are many Australian households who don’t have a mortgage and DO NOT make interest payments.
There are many Australians who save money. There are hundreds of thousands of retirees who use their savings as a source of income.
In short you fail.
BTW, nobody forces you to take out a gigantic mortgage and have large mortgage repayments.
That’s a separate issue to whether the big four banks are profiteering from the GFC-related collapse of competition in the mortgage market.
Katz @ 6 Exit fees of about $700. I’m assuming that is to exit a home mortgage loan from one/all banks and go elsewhere. I’ve just paid out of a CBA mortgage at a cost of $350 the difference, I guess, being that I was completing a loan, not being ‘disloyal’ and taking my business elsewhere. When I tried to suggest that they drop this costing as a ‘reward’ for my frugality, loyalty whatever after 25 years there was no give, its a fixed cost sucker. I’m glad to be rid of them. But it makes you wonder what is the paper cost to them of changing a loan detail and how they justify it. I’m not hopeful that Swanny will do much or that Brownie will provide some backbone.
Its a real pain to change banks – even if there was no fees.
I ditched NAB years ago for Bendigo, local, friendly, talkable to, flexible etc.
Credit unions are OK if you are in their targeted industry, teaching, uni, health etc, and conventional, otherwise they treat you worse than banks.
Robert Merkel, you are my favourite contributor to LP, but I must disagree with you (and Mark) here – the Reserve Bank figures re net interest margins simply do not bear out any conclusion of profiteering. Rather, net interest margins have been very flat for about half a decade now. Further, institutional business borrowers have copped more of the brunt of the banks’ increased funding costs than have Mum-and-Dad mortgagors (possibly, one might surmise, because of the public exposure that interest rates for Mum-and-Dad mortgagors are subject to). Finally, while the Reserve Bank has noted that funding costs have recently flattened, this does not negate the fact that banks are now rolling over debt that they incurred far more cheaply in 2007.
In short, I think the evidence for immoral profiteering by the banks is weak. While there is room for some public policy reform (eg re price signalling), any effect is likely to be marginal at best. Still, keep up the good work, Robert.
(Full disclosure: I am a banking lawyer who does some work for borrowers but does about 90% of my work for banks. Still, I think my arguments stand … but then, I would, wouldn’t I?)
Re the exit fees – let’s get real here. Even with an $700 fee to exit, compared to (for example) a $400k mortgage, $700 is small beans. In my experience with banks the borrowers just roll it into their next mortgage. The real fees are the ones that no-one here has mentioned – stamp duty, which also gets rolled into the next mortgage.
The $700 (or so) only gets paid if you back out of the deal early in any case – so if you really want to pay 2 lots of stamp duty inside of two or three years then you pay the early exit fee. Otherwise the typical amount is pretty close to zero.
In any case, the net interest margin (the real income margin of a bank) has been dropping for as long as I can remember. Decades ago (while the lending and borrowing rates were more regulated) the maxim of banking was called the 3-6-3 rule – borrow at 3%, lend at 6% and be on the golf course at 3.
Try getting away with that now. 3% has dropped to less than 2% everywhere – saving us all (or making us if we are lending to the banks) at least 1% interest per annum.
Nothing to see here. Another beat up.
Y’all are not going to want to hear this.
Profitability in terms of earnings per share in not that flash for the banks. I looked at current figures in relation to recent highs, 2007 or 2008, I think depending on reporting periods in relation to the GFC.
CBA is +3.7%, the only one in front.
ANZ is -4.8%
NAB is -22.6%
WBC is -2.4%
These are splendid compared to Suncorp which is down 59%, although that could have something to do with insurance as well.
Woolies has not had a GFC downturn and is up 22.2% on 2008.
Banks are big organisations, so produce big numbers. Terry McCrann, with whom I almost never agree, pointed out in a column recently that improved profits in the banks were almost entirely due to smaller allowances for bad and doubtful debts and that internally according to the usual ratios they are not all that profitable. I can’t find his article, but this one on NAB is along similar lines.
As a disclosure, I have shares in all the above, but also am a bank customer and have a loan that causes me quite a lot of pain.
Ah but if you don’t take out a loan to finance your basic housing you’re likely therefore to be in the private rental market, where the same marginal interest rate rises have crippled your landlord’s finances, forcing them to put their property on the market, giving you four week’s notice and subjecting you to periodic rent rises driven by interest rates.
Not that I’m bitter or anything.
Bobalot says’Do yopu have any actual evidence that banks are making obscene profits?” Banks produce nothing of tangible worth yet are the most popwerful institutions on the planet.How can the CEO of the Commonwealth be worth $16 million? All the big 4 made $20+ billion net profit.
Each yr in Aust $ 91 billion of new money is added to our economy toequal inflation 3.5% + GDP.Who owns this new money? ANS:Those who create it in their computers from nothing.This new money is $8500 for every working person pa.The RBA pays us a dividend of only $500 per working person.
Private banks should not be allowed to create any new money to equal GDP + infaltion.It belongs to all Australians.This new money should be created as a tax credit by our Govts rather than as debt by private banks.Eventually the amount of debt in our economy will be equal to the amount of money + assets.This is why with the sale of our Govt banks we have no money for infrastructure and our public facilities are sold off to service debt.
Shorter AR, ext fees are only a slight impediment to free movement of capital.
Stamp duties are archaic and many regime(s) should be changed. But they have nothing to do with the banks. So why introduce this red herring?
If one were to discuss the irrationalities of public policy in relation to residential housing, the elephant in the room is the exemption from capital gains. This regime encourages over-investment in houses. Australian houses are the world’s largest. This phenomenon encourages a pattern of consumption that induces people to value greatly their houses, distorting rational investment decisions.
Banks profit from this irrationality. But that isn’t the banks’ fault.
@Robert Merkel
It’s one bank that has kicked up this whinefest. Not “banks”.
See Brian’s post. Bank profits per share are not anything spectacular.
Here’s one thing that nobody addresses.
The RBA was planning on further rate rises. If the banks raise rates more than the RBA then the RBA wont raise rates again. It all evens out.
BTW, only the CBA has raised rates a small .2% above the official rate increase. NAB has said they wont be raising it above the official rate, so their rate will be 0.32% below the CBA’s (which begs the question, why are we complaining about lack of competition?). The others haven’t decided what they are going to do yet.
So why are we complaining about the “banks” when it is literally one bank?
Wait……It couldn’t possibly be moronic self righteous indignation?
@ Liam
1. Marginal rates are still lower than they were 10 years ago (From those graphs posted, it looks about 30% lower).
2. How landlords deal with their tenants is a separate matter. However, I do sympathise. I have had shitty landlords as well.
3. If a TINY rise in interest rates “crippled” their finances, they are idiots.
G Factor (and Brian), thanks.
Brian, as far as earnings per share go, didn’t the banks issue a bunch of new shares during the GFC?
Brian @ 29, when whoever it was on the radio told us how much profit the CBA had made this year, I wondered what the return on investment was. (And suspected it was actually quite low, which you’ve confirmed.)
I’m as happy to indulge in a round of bank-bashing as the next bloke, but I don’t think it’s justified in this case.
Brian, John Wasiliev is running the same considered line as Terry McCrann on this. It has been a beat up, to a large extent, but I am still not crying for the banks.
http://www.smh.com.au/money/banks-two-sides-to-the-coin-20101105-17h8x.html
More interesting has been the media boosting of Joe Hockey, straight after letting him off the hook over his “audit” election lies.
The banks, and their lapdog economists reported widely in the MSM commonly cite returns on their assets or balance sheet as being very modest. This is because they incude in their balance sheet all the money which has been deposited by other people as their own assets.
http://www.heraldsun.com.au/opinion/banks-treat-us-like-fools/story-e6frfhqf-1225949617637
Robert, I honestly don’t remember that happening, but then I don’t have spare dosh to invest, Also there are ways of raising capital other than from shareholders.
Joe 2′s link to John Wasiliev suggests that they did raise capital against bad things that didn’t happen. I doubt there was a substantial dilution, though. Wasiliev says that only the CBA has reached historical performance in terms of return on equity, which would take any new capital into account.
Ian Harper was just now on Breakfast saying that both statements are true – the Reserve saying margins have stabilised and the banks saying the cost of money has increased. It’s got to do with rolling over old loans of money they’ve borrowed overseas.
He reckons there is a need to review the financial system every 10 years, which is now overdue.
He also confirmed that there is a trade-off between competition and stability/risk/quality.
Hockey has scored on this one and there has been a wholesale belittling of Swan in the media, with cartoonists especially pungent. Tingle says he has indeed been working on changes to the banking system for some time and it has to be done with care.
Politics is seldom fair and can be cruel.
I think Mark is right that more policy debate has not served the public interest. I’d suggest it hasn’t served our enlightenment either.
I feel your pain, Liam. My landlord owns the house, but still puts the rent up every year. I have no complaint about that. He’s a good landlord and the rent still isn’t going up as high as the value of the house is rising.
But, it comes back to something Bobalot was saying. Interest rate rises are a good thing for me. I have my money in a nice interest bearing bank account and the rate is going up. Yet, these debates about the evil banks and rate rises only ever concern those who can afford to pay off a house in the first place. Huge swathes of the population won’t ever get to enter the market. This comes back to Liam’s question at 2:
“Why are so many people so dependent on financial institutions for their basic housing?”
We have thoroughly dysfunctional system for supplying such a basic need to all people.
Anyhoo, whether the banks are ripping off profits or not, the whole thing stinks of a political beat-up. Hockey thinks he’ll get some traction with a bit of bank bashing and the party starts. The party will die down again soon.
Robert @ 35 – the banks did raise more capital which is part of the reason for the increasing profits. When the media decries increasing bank profits, they don’t mention the extra amount of capital raised on which investors expect returns.
Katz @ 32 – originally I was querying whether the application fees on on home loans were subsidised to attract people. And so banks introduce exit fees to ensure that they still make a profit if people leave early. Its pretty common in other areas – eg I can get broadband connected with a high connection fee but can leave in a couple of months with little penalty, or I can have it connected at no cost, but pay a high exit fee if I leave in the first year or 2.
pablo @ 25 – actually if you threaten to leave and you are profitable customer the banks will often come to the party and throw something in. For example I have a $0/yr annual fee on a credit card for life (or so they promised but its been free for about 5 years so far) which would normally be around $150/year because I rang up to cancel it and I told them I thought it was too expensive.
Salient, that article linked is anything but objective. Andrew Norton is right that long term there has been a reduction of interest margins. My memory is that this came from competition from non-bank lenders and overseas banks that don’t offer retail services (don’t have branches and uneconomic small depositors).
The banks made up the loss of income from loan margins by a range of fees. I recall hearing that fees here are higher than in most overseas countries, who have fatter interest margins.
So it’s a trade-off. Many of these fees seem and are ridiculous but the bottom line is that it is way better for the public to have profitable banks than unprofitable ones.
BTW banks claim that customer satisfaction is at record highs, so this round of bank-bashing has probably taken them a bit by surprise.
Fine,
I would agree – as I have said elsewhere this is just some populist stuff from Hockey to get some airplay for a while and then to be able to claim some credit when the government does as the government always does – increases the amount of regulation.
The simple concept that it may be the consistent increases in regulation that are driving the consolidation does seem to have passed them by.
.
Brian,
You are at least partially correct on the fees – to some extend they have allowed drops in the net interest margin (NIM). The problem I have there (as a customer at least) is that many of the fees are disproportionate and so (IMHO) are unjustifiable. Not charging any fees is silly (also IMHO) as the result is that everyone ends up paying for the errors of the few, as the costs get included in the NIM so even those who manage their accounts well effectively pay them. If you have the fees roughly matching the costs then you have everyone paying for the use of funds correctly. Fees that are disproportionate to the costs just results in the people who manage their accounts poorly subsidising those who manage them well.
Brian, the article may not be objective but is it correct in claiming that banks claim other people’s money as assets? Do Banks also claim the money they have conjured up under fractional reserve as assets?
Salient Geeen.The fractional reserve system of banking must end.It is theft by stealth.Money represents human production and potential.Money is only its vehicle or oil, to make the economic engine run smoothly.The banks have hi-jacked the medium of exchange and hold uas all to ransom.
Arjay, be careful with that kind of language, you’re going to summon powerful forces…
I was hoping Mark Bahnisch would come back and back up his claim that the banks have engaged in illegal activity.
Brian @ 43 said:
Can probably put that down to unintended consequences. The influence of non bank lenders has certainly put pressure or home loan interest rates, but resulted in removal of cross subsidisation of other areas. So we end up with fees on ordinary bank accounts and branch transactions so the banks can compete in the home loan arena against organisations that don’t have those overheads.
And its those who never can afford a mortgage that pay for it as those with home loans can often get fee free accounts.
@48 – You need to be less literal in your reading practice. I’m not making a legal allegation, but pointing out that the big banks operate as an oligopoly in the economic sense of exercising disproportionate market power and gaining collective advantage thereby (whether intentionally or unintentionally). I’m not trying to buy into the debate over whether additional powers for the ACCC on price signalling or collusion are warranted. Rather, I’m describing the existence of a concentration of power and the particular way in which the public policy debate fails to get to grips with that.
Wouldn’t greater competition in the banking sector lead to more irresponsible lending practices, and simply shift us from one set of problems (excessive bank profits) to another (home loans/credit cards to people who can’t afford them)?
Speaking from personal experience, I can say that the sort of offers you could get for a mortgage loan from Wizard and Aussie in the mid 2000s were pretty crazy, and its no surprise to find a lot of over-extended mortgagees today.
Brian @40: “I think Mark is right that more policy debate has not served the public interest.”
Oh goody, you’re all going to go back to just shouting abuse at the Libs then? I do miss it.
Cartel behavior is illegal, period. See here: http://www.accc.gov.au/content/index.phtml/itemId/680739
If don’t believe the big four banks are engaging in cartel behavior you should never have made the allegation. Bearing false witness against one’s neighbour and all that …
Steve Keen doubts the case for more banking competition:
http://www.businessspectator.com.au/bs.nsf/Article/Banks-competition-regulation-debt-mortgage-lending-pd20101109-B23E8?OpenDocument&src=pmm
Mark,
Sabbra has a point – a cartel, which you allege exists in your post, is an offense. There is a difference between cartels and oligopolies, although one can lead to the other.
Jesus wept sabbra – get a life. Mark’s comment is an opinion not an allegation. What’s more it’s an opinion based on objective facts, the BIG 4 banks do occupy a dominant market share and there is little essential difference between them. On those facts it is irrelevant whether the oligopoly arises from willful collusion or merely by coincidence, what remains is still an oligopoly.
dave,
Mark’s words were “[o]ligopolistic cartels can do as they please.” Sabbra is strictly speaking correct that this is an allegation of an offence under the Trade Practices Act.
Perhaps we should just agree that Mark mis-typed and should have said “[o]ligopolies can do as they please” and move on.
Spare us Andrew. Maybe Graeme Samuel hasn’t had a chance to pounce yet.
Dave,
Do learn to read. My beef is with Mark’s cavalier and false cartel charge. A cartel is an explicit criminal conspiracy and it is subject to severe penalty. I have no problem with the oligopoly descriptor.
Liam,” Be careful with that kind of language,you are going to summon powerful forces.” Was that a veiled threat Liam or helpful advice?
The revolution has begun because the oligarchs became too greedy.They want it all.We the worker either stand up and fight or crawl on our knees and beg for existance. http://secretofoz.com/
There may be sufficient uncertainty with regard to intent but the behaviour of the big 4 banks mimics that of a cartel and it is possible to read Mark’s original remark as a similitude.
joe2,
Good to see your usual substantive contribution.
.
dave,
How would you differentiate an oligopoly that mimics a cartel from a cartel?
Thanks Andrew@61. I see you have not swayed in your relentless campaign to regulate debate on economic topics. Well done!
Answering my own question @45, banks consider deposits and their own borrowings as liabilities but loans are assets.
In other words, money they have conjured up, which is a multiple of a liability, is now considered by banks as an asset to calculate their shareholder equity of assets minus liabilities.
In a crisis also these ‘assets’ are a liability. I think that banks to use this sort of accounting to claim modest profits is deceit.
Take away these conjured up assets and I’m guessing you have a case of super profits.
Salient Green @62 – it is not loan that banks consider assets, but rather debts owed to it. In this respect, banks are the same as every other business, from your humblest farmer to your largest conglomerate. Debts owed to a business are asset of that business: that is Accounting 101. How else would you account for debts owed to your business in your financial statements?
Still, if you don’t like ROE as a measure of whether profits are “super”, perhaps give us your figures for net interest margins or dividends as a percentage of shareholders’ equity that would equate to “super” profits. We can then give you the actual numbers…
Andrew,
Surely you answer your own question.
An oligopoly that mimics a cartel is a cartel
Salient Green @ 63, I’m sure the banks don’t make up the accounting rules.
Anyway, in the AFR on the weekend we were told that on a like for like basis the return on assets for banks is now comparable with what it was pre-GFC.
Batellini of the Reserve Bank also pointed out that there is one thing worse than profitable banks, and that’s unprofitable banks. If the banks had moved only in line with the cash rate since the GFC they would now be unprofitable.
He also pointed out the the Reserve takes into account what the banks have done with interest rates in moving the cash rates. The implication is that if the banks hadn’t lifted rates then the Reserve would have done it instead.
There are a lot of issues we should be thinking about in bank behaviour and financial services policy more important than this one IMHO.
Further up-thread, Robert Merkel, I think that any GFC-related capital raising by banks would have been in relation to shoring up tier 1 capital. Again, while the numbers may be big, we would be talking about small amounts in relation to market capitalisation, I suspect low single figure percentage terms. Someone more knowledgeable might know.
Brian,
I agree with most of what you say however both the RBA and Treasury are now publicly very sceptical of what the banks are doing because their margins are increasing not falling falling.
And yest the RBA has always targeted retail rates not wholesale rates
Brian,
The definition of bank capital is a regulatory one, rather than an accounting one. If you use the accounting numbers then bank capital is a fair bit lower than the regulatory numbers – one of the several issues I have with the regulations. (IMHO they should probably abandon the regulatory numbers and just use the accounting, but what do I know).
The (regulatory) capital raised during the GFC was actually quite high, but the accounting capital did not move much.
.
G Factor,
Well answered. It looks like SG and Arjay are substantially in agreement.
Perhaps the Australian Bankers Association should engage the same PR firm as the miners did over the resources rent tax.
I figure that they could put up a far better case than the miners. (not that that is a high bar at all). At least the banks are part of the slower speed of the two speed economy.
The stamp duty issue is important. Banks could withdraw the exit fees, look virtuous, and there is still almost the same penalty for switching, collected by State Governments. In fact they could then charge an increased up front fee for starting the load which includes the costs of terminating and establishing. Whacko.
I just wonder how much of this is the traditional hate that lenders have for those that lend to them and have the nerve to want to make a business of it. Moneylenders and financiers throughout history have had a hard time of it from those who borrow heavily, and then, having spent, resent having to pay the money back.
G factor @ 65 and any other dissenters, try googling “are loans assets for banks” or “bank balance sheets” and you will get a plethora of sites which say a ‘loan’ is an asset!
http://thismatter.com/money/banking/bank-balance-sheet.htm
http://www.fool.com/investing/general/2007/01/05/understanding-a-banks-balance-sheet.aspx
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=bank+balance+sheet
As Brian said, the banks may not make the accounting rules. But, to call other people’s money your own by treating it, and multiples of it, as your asset for the purpose of minimising the public perception of super profits, is deceit.
And I would add that using the same accounting to maximise the perception of shareholder equity is deceit.
G factor @ 65 and any other dissenters, try googling “are loans assets for banks” or “bank balance sheets” and you will get a plethora of sites which say a ‘loan’ is an asset!
As Brian said, the banks may not make the accounting rules. But, to call other people’s money your own by treating it, and multiples of it, as your asset for the purpose of minimising the public perception of super profits, is deceit.
And I would add that using the same accounting to maximise the perception of shareholder equity is deceit.
Salient Green @ 73 – I’m sorry, but technically it is the debt owed to the bank (and not loans made by the bank) that constitutes the asset on the balance sheet.
Meanwhile, I’m afraid that you get things completely the wrong way around when you say that banks commit deceit insofar as they treat “other people’s money … as [their] asset”. In fact, deposits made by people with banks constitute a LIABILITY on the relevant bank’s balance sheet, not an asset. You might find the Wikipedia entry on “Liabilities (financial accounting)” a useful and quite user-friendly primer if you haven’t studied or practised any accounting before.
Cheers, GF
Also, SG, you still haven’t told us what percentage net interest margin or what dividend / share price ratio would indicate unfair or “super” profits in your world. For example, if bank shareholders are enjoying a dividend return of about 7% per annum on their investment, is that really “super” unfair?
G factor, wake up to yourself. 300,000 sites say ‘loans’ under ‘assets’ and ‘deposits’ under ‘liabilities’ when they are the same money, and you presume to lecture me after I presented the information to you. Such arrogance.
Your beloved banks are shonks and con artists. If they listed the expected loan interest revenue only as assets they would be presenting a truthful picture, but they don’t. The money they have multiplied out from a deposit or borrowing, by fractional reserve, is a liability as it must be repaid somewhere along the line.
@75, it was obviously a bit late for you there so read the last para of 73. The shares are overvalued to buggery because of this shonky accounting.
SG,
If I lend you money then you owe it to me – that is a liability from your point of view and an asset from mine. If you lend money out to someone else then you have an asset and the person you lent it to has a liability.
No deceit, trickery or anything else – just plain common sense and one that arises naturally from the legal position that when you lend money to someone that money becomes their property, subject only to a contractual right to be repaid in money of the same value, plus any interest.
How would you change the the legal and accounting positions to, in your view, correct this?
SG
It’s basic double entry accounting. If you lend me $10, I have an asset – $10 in cash. I also have a corresponding liability which is the obligation to pay you $10.
Fairly obviously these cancel each other out.
The banks make their money on what they do with the cash they have (the asset) before they have to return it to the owner (the liability). This is their return on investment.
It is not deceitful at all.
or to get back to the topic the interest margin is the difference between what banks charge for loans and what they pay for deposits.
It is at levels that are preGFC .The Banks in their excuses only talk about their borrowing costs but not the charges for their loans.
The Treasury and RBA ( and the Government)are saying since margins are already high they are recovering their costs and the present hikes are the result of an uncompetitive market.
The problem is once you make an omelette you cannot uncook it.
Most takeovers over the past decade should never have been allowed.
It is the small and medium business owner that is being slugged rather than the home buyer.
I notice the shrillseekers at Catallaxy believes this is the same as what Chavez does.
Amazing
Thanks, AR @ 77, right on target!
Matt D, I’ll work on yours because it is down to earth. I’m not suggestion the accounting process is deceitful in itself, but to use that accounting process which multiplies the original deposit, to change the perception of real worth.
If I deposit $10 and they loan it out that’s a liability and then an asset, fine. Then they loan it out again less $1, and again etc until 0 remaining to loan and a total of $55 in loans. That’s fine too. And to call each of those fractions an asset is fine also for the purpose of their accounting.
But, those fractions are not assets in the way any other business or person means by a ‘assets’ because they cannot be realised for their stated asset value. The $55 has to be repaid and when it has, the bank is left with the interest gained on $55 only.
Therefore, it’s deceitful to present those fractions to the general public as assets in the way we understand assets, which are something that can be realised. It’s not an investment of the banks’ funds. So rather than a return of 5%, leave out the fractions and it would be more like 27% return on investment. Superprofits.
SG,
It is not deceitful, you are simply confusing a static concept (the amount of money in an economy) with a flow concept (the fact that money can, and is, used many times over a given period.
Each time that money is lent (and borrowed) it generates real economic activity. No-one just borrows money to then bury it in the back yard until they need to repay it (plus interest). They go out and buy things, hire people to work and other such activity. To repay the money they need to earn more than they originally borrowed to pay it back (plus interest).
The lending has, therefore, been useful in employing people.
Don’t get the static and the flow mixed up – that is where the Rothbard and Social Credit mobs get it all so wrong.
Let’s look at it another way. The banks and other lapdog economists claim that their profits are very modest at 5% of assets.
The problem with this stance is that the banks generate most of their ‘assets’ and vast amounts of them out of thin air and those ‘assets’ remain thin air or return to thin air. It’s not like you’re left with a truck or a house to sell after 10 years of paying it off while it’s making profits.
For the purpose of reporting a percentage return on assets, banks are reporting a return on what is mostly a bloody big fat bubble of leverage.
Banks generate their profits out of trying to make sure that those who earn money and then lend it to the bank are paid a little less than they get from those who borrow it and then do something productive with it to earn enough to pay them back.
If they get that wrong they make a loss. If they get it right they make a profit.
Where is the “thin air”?
The thin air is fractional reserve banking. I appreciate your engagement with this discussion Andrew just by the way.
@ 85
As much as you’ll hate this, banks charge enough to cover a risk-free return, the time value of money, a bit to compensate in the event a punter defaults, and a small margin for themselves. The small margin for themselves is the only bit they keep … usually distributed back to investors. The fact that they do all this on a large scale is the only ‘super’ aspect of their business.
You need to take a relative vantage point … don’t get put off by absolute numbers. They’ll serve you the absolute numbers on the six o’clock news so that the average punter will choke on their dinner, but it’s a proportional difference. These are big businesses, not corner stores.
“The thin air is fractional reserve banking.”
O noes!
Fractional reserve banking is transparently based on something less than ‘real’ money. It’s self-evident that without fractional reserve, banking would be simpler.
That is NOT a good criticism of fractional reserve.
The point is, it’s a fiction which works very well most of the time. Without fractional reserve, banking would be shitter in every regard except simplicity. Deposit holders would pay for a little real-estate in a well-guarded safe, and that’s the end of it.
FDB,
It is not even a fiction. I (as a bank) borrow money from a lot of people. I lend to a lot of people. I keep enough (hopefully) of the money that was lent to me to cover all the normal and most of the abnormal requirements of the people that lend to me.
The point is that, without fractional reserve, I would become a warehouse, charging fees (lots more fees than currently) just to act as a glorified guard for other people’s money.
With fractional reserve, instead of charging large storage fees I pay interest and charge small fees. In return, the depositors take a small risk that they may not get all of the funds they deposited with me back. If you want to imagine what banking without fractional reserve is like, try renting a safety deposit box and putting your cash in there.
Where is the fiction?
Again, SG, you are confusing a static concept with a flow concept. There is no “thin air” once you get past that fairly basic misunderstanding.
FDB, I’m not really concerned with criticising Fractional reserve, just how it affects the way profitability of banks is presented to the general public. Apart from that I have the feeling that some of the meaning of your post has gone over my head. Definitely not your fault though.
Rob, some of that was helpful, some went over my head and some still dealt with internal accounting whereas I am concerned with the way they present their business profitability to the general public and shareholders.
The fact that many prominent economists are speaking out in favour of banks should ring alarm bells to any social democrat or democratic socialist. Then again, how can we blame the banks which only operate within the boundaries set for them by governments.
SG,
I disagree with a lot of what you have said on this thread, but the last sentence was your best – banks operate in a highly regulated fashion. If they are doing it wrong do we blame the regulators or the regulated?
Sorry Andrew, I guess I was pandering a little.
The only fiction is in the minds of those who don’t understand that FR means everybody can’t get all their deposits back all at once, and who believe that somewhere in the deposit account contract they signed there simply must be a guarantee that they can.
Most such folk don’t even stop to think that no bank is expecting to be able to precipitiously call in all its debts either, and that it’s a perfectly consensual quid-pro-quid.
Of course, anyone who wants to take the trouble to understand what they’re doing with their hard-earned can actually read their contract and instead opt for a safe-deposit-box (or Milo tin and baseball bat) should they wish.
FDB,
I think my attitude to this has hardened somewhat after long debates with our feathered friend as well.