Federal Treasury recognises the ‘benefits’ of breaking up banks

Editor

This article is based on information provided in a recent media release of the Citizens Electoral Council (CEC) on 15 May 2018. ERA Review does not usually draw attention to material put out by political parties, however the statement seems well researched and is in alignment with ERA’s concerns about banking malfeasance in Australia and New Zealand.

According to that statement: In its last day of hearings on 27 April the banking royal commission asked Treasury, the regulators and the banks to justify so-called vertical integration, i.e. banks owning the businesses that create the financial products that the banks advise their customers to buy. In response, Treasury has done a backflip of sorts from its years of defending vertical integration, to concede that there will be benefits from a structural separation of banking. For their part, each of the big banks forcefully opposed structural separation. If anything, this is the best argument for it – if the self- serving banks don’t want to be broken up, it must be right! ”

Rowena Orr, the Counsel Assisting, in her summary of the previous fortnight of royal commission hearings (which provided examples of how the financial advice operations of AMP and CBA had exploited their customers) asked for submissions to answer the question: “Does vertical integration … serve the interests of clients? If so, how?”

The explanation given by CEC is that:
Treasury’s submission demonstrates the impact of the royal commission.
Treasury boffins—many of whom are past and/or future bankers by virtue of the revolving door between banks and the department—know that they can no longer defend the status quo, as they have for years in response to calls for a Glass-Steagall separation of commercial banks from all of the other financial services. For instance, in a 28 April 2016 letter for a constituent of the then- Member for Longman Wyatt Roy, Treasurer Scott Morrison claimed that “the Australian financial system already exhibits a high degree of structural separation”.

The Federal Treasury’s submission states that “consideration of options for structural separation requires weighing costs and benefits”. The main “cost” that Treasury cites is the loss of economies of scale; if you are a customer of a mega-bank it is cheaper for the bank to provide you its various services. However, the royal commission has shown that in practice that has meant it is cheaper for the banks to fleece you and countless others on an industrial scale. Thus:

Treasury concedes that the benefits of structural separation include: the removal of conflicts of interest which tempt banks to lure their customers into risky financial products for the bank’s, not the customer’s, profit; and a higher price for other financial products, which ‘would not be a negative outcome’, Treasury notes, because it would make customers realise that in many cases they don’t need those extra products at all! In other words, if bank tellers were not pressured into coaxing customers into some other product such as insurance or financial advice, most customers wouldn’t seek them out because they don’t need them in the first place. Treasury suggested the Commission could first consider how to mitigate conflicts of interest without breaking up the banks, and then compare that approach to any additional benefits from structural separation. However, before making that suggestion, the Treasury admitted that steps have already been taken in recent years to mitigate conflicts of interest, but they haven’t worked. ‘The hearings have provided evidence that conflicts of interest continue to lead to poor consumer outcomes, and have contributed to poor firm culture’ Treasury’s submission stated, ‘notwithstanding a number of reforms in recent years that have sought to eliminate or mitigate such risks’. ”

The ‘ring-fencing’ fraud

It seems that the Australian Treasury, in conceding to the benefits of breaking up the banks, has been attempting to steer the discussion in the direction of the debate about ring-fencing vs Glass- Steagall-type separation that raged in the UK in 2013. Attention has already been drawn to the inadequacy of ring- fencing proposals, for example in ERA’s submission to the 2014 Australian Financial System Inquiry, as reported in previous issues of ERA Review, including the Jan-Feb 2018 issue [1]. And in this context, the CEC statement continued with some historical background: This was in the wake of the global financial crisis when the U.K. government spent hundreds of billions of pounds propping the banks up, including through emergency nationalisations. Ring-fencing was the recommendation of Sir John Vickers, the former Bank of England chief economist who chaired the 2011 Independent Commission on Banking that inquired into the banking practices that led to the crisis. With no good argument against the principle of separating traditional banking from other financial services, Vickers and the private banks – which were desperate not to be broken up – resorted to the argument that the same effect could be achieved without a full Glass-Steagall separation, by requiring the banks to ring-fence their retail divisions from their other divisions, but allowing them to stay under the same roof. Unconvinced, 445 members of the Commons and Lords voted for an amendment to the 2013 ring-fence legislation to turn it into full-scale Glass-Steagall, which was only narrowly defeated. In the debate, one former banker, Lord Forsyth of Drumlean, warned that ring-fencing wouldn’t protect depositors from predatory bankers, as ‘investment bankers are extremely adept at getting between the wallpaper and the wall’.

Five years after ring-fencing was legislated, Vickers now admits that the UK’s banks are still not prepared for another financial crisis. Speaking at a Financial Times/Fitch global banking conference in London on 2 May, Vickers warned that British banks are still undercapitalised and vulnerable to the impact of a new financial crisis. He said that leverage in the British banking system was ‘dangerously high’ as regulators ‘fell short’ of what was required to crisis-proof the system. Vickers didn’t say it, but these ongoing risks in the UK’s banks can be blamed on the Parliament not legislating a full-scale Glass-Steagall in 2013. ”

The largest banks within Australia are unwilling to be broken up, which would seem to have a bearing on why they have suddenly expressed concern for the best interest of their customers. It is noteworthy that CBA, in its submission to the royal commission, said that such separation ‘would significantly erode the benefits that customers currently enjoy’. Perhaps these are the same ‘benefits’ exposed by the royal commission? And both NAB and ANZ have promised that vertical integration can work if conflicts of interests are ‘managed’. Likewise Westpac, ‘provided appropriate protections are maintained’.

Concluding, the statement dismisses all of the bank claims as obfuscation and humbug: “The banks don’t suddenly care about their customers – they are desperate not to be cut off from fleecing depositors and gambling with their deposits. Their desperation demonstrates that they must be broken up. ”

1. Hermann, J., “Latest financial inquiry will fall short of what is needed”, ERA Review, v10, n1 (Jan-Feb 2018), p26