Banking Culture – Page 90 – Digital Finance Analytics (DFA) Blog

Risks within the housing and residential development markets remain elevated – APRA

APRA Chairman, Wayne Byres in his Opening statement to the Senate Economics Legislation Committee highlighted again the regulators views that there are elevated risks in the housing sector, despite tightening of underwriting rules in the past year. They are looking at additional ways to embed better and sticky lending standards into the banks. Some would say better late than never!

Our supervisory work on housing lending standards continues. Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans. Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated. We are therefore giving thought to how best to have improved standards firmly embedded into industry practice, such that they are not eroded away again over time.

He also discussed the risk culture information paper which we featured yesterday.

Earlier this week, APRA published an information paper on risk culture – a topic that we have given greater attention to over the past few years. The paper focusses, amongst other things, on how Boards of regulated institutions have gone about the task of assessing the risk culture within their organisations, given the introduction of specific prudential requirements in this area from January 2015. Assessing risk culture is no easy task. But, as the global financial crisis showed, if an organisation has a poor attitude to risk-taking and risk management, it can ultimately threaten an institution’s financial viability. So one of our key messages is the need for continued investment of time and attention by senior leaders on this issue.Just as regulated institutions will refine and improve their own practices, we will continue to refine our approach and methodologies for making assessments of risk culture within regulated institutions. We will also, in particular, be looking more closely at the influence of remuneration arrangements on that culture.

As the Committee knows well, there have been some serious allegations of inappropriate and unfair treatment of life insurance claimants by The Colonial Mutual Life Assurance Society Limited, trading as CommInsure. While ASIC has been dealing with the specific customer cases, APRA takes an interest in what these cases tell us about the strength of an institution’s governance, risk management and risk culture.Our work with CommInsure has targeted two main issues. First, APRA has engaged with the Board and senior management of CommInsure to gain assurance over the robustness and completeness of the independent reviews commissioned to investigate the allegations, and ensure to stakeholder and community expectations are considered through this process. We have also met with the whistleblower who brought the issues to light, and are considering whether the whistleblowing provisions in the Life Insurance Act designed to prevent the identification and victimisation of whistleblowers have been adhered to.

Earlier this year, APRA also wrote to the Boards of all active life insurers, as well as to a selection of superannuation trustees, seeking information on the effectiveness of their governance and oversight mechanisms for matters such as claims handling, benefit definitions, rejected claims and customer complaints. Based on the responses received, we issued a report last week identifying areas in which insurers and trustees can improve their management of life insurance claims.

APRA and ASIC have been working closely on all of these matters, which remain ongoing.

California Attorney General Launches Criminal Probe Into Wells Fargo Over Fake Accounts

From Zero Hedge.

John Stumpf is now gone from Wells Fargo, but his – and the bank’s – problems may be just starting.

According to a report by the LA Times, California Department of Justice is investigating Wells Fargo on allegations of criminal identity theft over its creation of millions of unauthorized accounts, according to a search warrant sent to the bank’s San Francisco headquarters this month. The warrant and related documents, served Oct. 5 and obtained by The Times through a FOIA request, confirm that California AG Kamala Harris, in the final weeks of a run for U.S. Senate, has joined the growing list of public officials and agencies investigating the bank in connection with the accounts scandal.

As Reuters adds, the AG warrant seeks to seize documents at Wells, and cites probable cause that felonies were committed at the bank.

Harris’ office demanded the bank turn over a trove of information, including the identities of California customers who had unauthorized accounts opened in their names, information about fees related to those accounts, the names of the Wells Fargo employees who opened the accounts, the names of those employees’ managers and emails or other communication related to those accounts. Her office is also requesting the same information about accounts opened by Wells Fargo workers in California for customers in other states.

While on the surface this would be an admirable move, it appears to be merely the latest attempt by a politician to score brownie points with voters. According to the LA Times, Harris has made her combat of wrongdoing in the financial services industry one of the themes of her Senatorial campaign. She has especially pointed to her role in negotiating $20 billion in relief from banks for California homeowners who lost homes or suffered losses in the housing bust. But that deal failed to live up to promises she had made to send those responsible to jail, opening her up to some criticism.

APRA On Risk Culture, and ABA’s Response

APRA has released a series of documents on the risk culture within financial services organisations. They will be looking at the risk culture of entities, as well as remuneration and its linkage to risky behaviour.

They are also seeking to harmonise prudential standards across APRA-regulated industries where appropriate and practical. This ensures that like risks are treated in a like manner so that no significant differences arise in the regulatory treatment of entities with similar risks operating in different industries.

The 2008 financial crisis revealed major shortcomings in the way the global financial sector managed risk. This was not solely an issue of poor risk measurement, or weaknesses in internal control structures. It also reflected deficiencies in institutions’ attitudes towards risk. In combination, a poor risk culture and weak risk management (the former often being the root cause of the latter) led to unbalanced and ill-considered risk-taking, to significant losses and, in some cases, to institutional failures. The impact on the financial stability of affected countries was significant.

Although APRA-regulated institutions avoided the worst of the financial crisis, Australia has not been without its own examples of poor risk culture. The failure of HIH Insurance in 2001, for example, highlighted the central role that a weak organisational culture, and a dismissive attitude to risk management, had in the demise of the insurer. Similarly, foreign currency trading losses at a major bank in 2004 identified the link between the risk culture of its trading area and the scant regard given by the business to the underlying risk and management risk limits.

More recently, APRA highlighted the emergence of increased risk-taking within the life insurance industry with respect to the underwriting and pricing of, in particular, group insurance business. At its heart, this stemmed from a focus on growth without, in a number of institutions, adequate regard to the risks that came with it. Similarly, in the past few years, APRA observed that sound market practices for the origination of residential mortgage loans had, in some instances, been sacrificed to considerations of preserving market share and growth.

Unlike the earlier episodes highlighted above, which affected individual institutions, the more recent issues in group risk insurance and mortgage lending have manifested in a deterioration in general industry practices. There is nothing wrong with an institution or an industry pursuing a higher risk strategy, provided it does so consciously, and with appropriate risk management capabilities and financial capacity. In some of these cases, though, hindsight and supervisory scrutiny would suggest that the decision was not a conscious one: considerations of risk were not always front of mind in a highly competitive environment.

It is also interesting to juxtapose these recent experiences with the assertion made by most institutions that they believe they have a good, if not strong, risk culture; to the extent there are deficiencies in the industry, most institutions consider they exist within their peers. And where there have been specific problems identified within their own businesses, ‘bad apples’ are typically seen as the cause. Yet in the case of mortgage lending standards, for example, there were few lenders who could claim their risk culture was sufficient to prevent them succumbing to the weak practices that eroded industry standards.

Unfortunately, a poor risk culture can persist for some time without detection, or immediate damage. Typically, it will be when a poor risk culture is combined with adverse market conditions and/or other stresses that there is greater potential for a build-up of unbalanced and ill-considered decisions to result in significantly adverse, and potentially crippling, financial outcomes. Good times will often mask poor practices. In an Australian context, where the domestic economy has enjoyed 25 years without a serious recession, this should sound a clear note of caution against complacency.

As well as setting out global developments in risk culture, APRA highlighted the following key areas of focus.

Continue to encourage APRA-regulated institutions to focus on risk culture

APRA’s initiatives that will help maintain the prominence of risk culture within regulated institutions include:

engaging with the broader APRA-regulated financial sector – through, for example, speeches and publications such as this one – to reinforce the need for continued focus on risk culture and, where needed, highlighting any areas of concern;

providing information and guidance to industry, where appropriate, on approaches that can be used to assess and strengthen risk cultures;

bilateral discussions with institutions’ senior executives and directors to highlight and seek remediation for any specific concerns that are identified through routine supervision activities; and

conducting pilot on-site reviews at individual institutions focussing specifically on risk culture.

A more anticipatory supervisory approach to risk culture

Although APRA already considers risk culture as part of its ongoing supervisory activities, APRA intends to refine and sharpen its approach to assessing risk culture. Conducting pilot risk culture reviews will form a key component of this work.

APRA expects that this more intensive review will enable it to better anticipate potential risk issues, and strengthen its forward-looking supervisory approach. For example, where a regulated institution is found to have indicators of a poor risk culture, supervisory attention will correspondingly increase. As with APRA’s more general approach to supervision, which focusses on the prevention of problems before they materialise, the goal of these risk culture reviews will be to promote prompt corrective action to any shortcomings identified, or establish mitigating actions. In doing so, the potential for loss from unbalanced and ill-considered risk decisions is reduced, potentially adverse outcomes for depositors, policyholders and superannuation fund members can be avoided, and (in the extreme case) threats to financial stability are eliminated.

Reviewing industry remuneration practices

The remuneration requirements contained in CPS 510 were introduced in 2010 for ADIs and insurers. Requirements for superannuation were introduced in Prudential Standard SPS 510 Governance22 in 2012. The fundamental principle underlying these requirements is that performance-based components of remuneration must be designed to encourage behaviour that supports:

the regulated institution’s long-term financial soundness; and

the risk management framework of the institution.

Remuneration frameworks, and the outcomes they produce, are therefore important barometers and influencers of risk culture.

APRA intends to conduct a stocktake of current industry remuneration practices to gauge how well existing requirements are being implemented, and how they are interacting with the risk cultures of regulated institutions. This will include reviewing the remuneration arrangements and outcomes for some senior executives, risk and control staff, and material risk-takers at a sample of institutions.

APRA will also use this opportunity to compare its remuneration requirements with more recent international regulatory developments and supervisory practices.

This work will commence in 2016 and will continue into 2017. APRA will engage with industry participants, as well as relevant industry experts, throughout this period as it formulates its views.

The Australian Bankers Association welcomed APRA’s announcement.

The Australian Bankers’ Association has welcomed today’s release of an information paper by the Australian Prudential Regulation Authority on the risk culture of financial institutions.

“A lender’s risk culture impacts every decision it makes and is the cornerstone of a stable financial system,” ABA Chief Executive Steven Münchenberg said.

“We welcome initiatives that help banks understand and manage their own risk culture, and we are pleased that APRA has noted an improvement in how directors focus on the risk culture in their organisation,” he said.

“It is important that the tone is set from the top and employees have a clear framework to make decisions that appropriately balance the potential gain with any potential loss.”

APRA’s paper looks at how different organisations approach risk culture and how this relates to company values. It also outlines APRA’s future plans to encourage institutions to focus on risk culture.

Mr Münchenberg said the ABA agreed on the need to build on the work that had already been done.

“There are many elements to a strong risk culture, including having clear business objectives, values and understanding of risk appetite.

“Banks recognise that demonstrating a strong risk culture will increase the public’s trust in the financial sector. We look forward to working with APRA on how risk culture can be strengthened to ensure banks have the right practices and behaviours,” he said.

The big banks and AMP must now pay for a financial adviser watchdog

From Business Insider.

New laws regulating financial advisers will see the big four banks and AMP funding an independent body to oversee professionals standards in the troubled wealth management industry.

The federal legislation, to be introduced to parliament later this month, will mandate professional standards for financial advisers, including qualifications, exams, continuing education and a code of ethics.

“This independent standards body will raise minimum standards in the financial advice industry and improve public confidence in the sector,” says Kelly O’Dwyer, the minister for financial services.

The wealth management industry has been hit by a series of scandals where customers have been given bad advice and lost life savings and retirement nest eggs.

The big bank CEOs have already been questioned in a parliamentary committee on their track record and whether any senior executive had lost their jobs because of poor financial advice.

The Australian Financial review says that the corporate regulator ASIC will next week release a report that reveals the big banks and AMP have been shortchanging customers tens of millions of dollars by charging them for services they didn’t get.

The professional standards legislation will establish an independent standards body, funded “exclusively” by the large banks and AMP, the biggest players in the wealth management industry.

The new professional standards regime will start January 2019. Existing advisers will have until January 2021 to pass the new exam and until 2024 to reach degree-equivalent status.

Professional associations and other independent third party monitoring bodies will develop compliance schemes to monitor and enforce advisers’ adherence to a code of ethics. These compliance schemes will be approved by ASIC.

O’Dwyer says the reforms ensure financial advisers will be held to a high standard of ethics, with non-compliant advisers subject to disciplinary action and sanction by the monitoring bodies.

In reaction, the Australian Bankers’ Association has today welcomed the Federal Government’s announcement that it will introduce new legislation into Parliament this year to create a new independent body to set higher professional standards for financial advisers.

“This is an important step in the professionalisation of the financial advice industry,” ABA Executive Director – Retail Policy Diane Tate said.

“Customers rightly expect to receive high quality financial advice to help them maximise their savings, build their wealth, plan for retirement or help manage their money in retirement.

“The new education and professional standards framework will mean we have more competent financial advisers who meet higher standards of ethics and conduct.

“Banks support the introduction of higher minimum qualifications, a new exam for all financial advisers, a new supervision year for new financial advisers, mandated continuous professional development requirements and a model code of ethics for all financial advisers,” she said.

“Banks (Financial advice banks are ANZ Banking Group, Bendigo and Adelaide Bank, Commonwealth Bank, Macquarie Group, National Australia Bank, Suncorp Group, and Westpac) are helping to fast-track the professionalisation of the financial advice industry by agreeing to fund the establishment costs of the new independent body. This will mean that the new professional standards framework can be introduced as soon as possible.”

Ms Tate said banks had already made significant changes to their businesses to lift standards.

“We have led the way on industry reforms including changing how banks hire financial advisers, so they know a lot more about the adviser’s conduct history and performance before employing them.

“The aim is to better identify financial advisers who have not met the industry’s minimum legal, conduct and ethical standards, and help ensure Australians can trust they receive financial advice from professional, competent and ethical financial advisers at their bank,” she said.

The ABA’s new protocol for hiring financial advisers is open to all providers of financial advice, and allows signatories to ask a standardised series of questions about the financial adviser’s conduct history, quality of advice, risk management and compliance record.

The banking industry is also working on additional industry standards to ensure that banks can apply the Government’s professional standards framework in their competency and training programs, human resources policies, and compliance frameworks.

“Our efforts as well as the new standards set by the Government will serve to professionalise, and build trust and confidence in financial advice from banks,” Ms Tate said.

Time To Read Your Credit Card Small Print

Our research shows that households do not know what they are paying in fees and charges on their credit cards, nor the value of “rewards” on these cards. This is over and above transaction surcharging which has been subject of recent regulatory review. The RBA says in 2015, households paid $1.5 billion in card fees, up 6.6% from the previous year.

Bank-Fees-2016-2

In fact there have been a number of changes to the terms and conditions of credit cards from several of the large providers. This is in response to recent changes to payment regulation, and banks seeking to capture more value from non-revolving card holders.

It is worth checking the true value of rewards points, which we think are being devalued (the so called earn and burn rate) means you spend more for less benefit. In addition, fees on reward cards have been rising steadily.

In addition, there are a range of other potential transaction fees. For example, an Australian dollar transactions from overseas merchants now carries a fee, by for example the CBA. Whilst foreign currency transactions did cop a charge, Australian dollar transactions did not. The CBA says:

We charge you an international transaction fee when you make a purchase or obtain a cash advance (whether in a foreign currency or Australian dollars):

While overseas; or In Australia (for example online) where there is an overseas connection, as the merchant, or the financial institution or entity processing the transaction, is located overseas. The international transaction fee for these transactions is:

Transactions converted by MasterCard® or Visa – 3.00%

Transactions converted by American Express® – 2.00% (plus a currency conversion factor of 1.50% which is included in the converted transaction amount)

Transactions in Australian dollars but with an overseas connection – 3.00%

In some cases, overseas merchants may allow you to pay in Australian dollars, e.g. when you’re shopping online or over the phone. This is still considered an international transaction because your transaction is processed overseas.

Note: Even though a merchant has a website address ending in ‘.com.au’ and displays prices in Australian dollars, they may still be located overseas or otherwise choose to process their credit card payments outside of Australia. It’s best to check with the merchant before you pay if you are unsure.

Depending on your card use – if you revolve and pay interest, then the interest charges will swamp most other charges, – it would be worth looking at some of the non-reward, no fee cards which are available, because these sneaky little fees soon add up.

We think there is a case to make the disclosure of fees on credit cards clearer, and for consumers to reconsider whether reward schemes attached to cards are worth having at all. You can compare cards here.

ASIC probe finds insurance claims issues

From AAP via The West Australian.

The corporate regulator’s review into insurance has uncovered concerns about how claims are handled but no evidence of industry-wide misconduct.

The Australian Securities and Investments Commission said on Wednesday that delays in claims handling and the evidence insurers require when assessing claims were the most common cause of disputes with customers.

The review of 15 insurers that make up 90 per cent of the industry showed that declined claim rates were highest for total and permanent disablement.

There were higher claims denial rates for insurance policies sold directly to consumers with no financial advice.

Some insurers had substantially higher than average declined claims rates and a substantially higher than proportionate share of disputes about claims.

However, nine out of 10 claims made on four major types of life insurance policy between 2013 to 2015 were paid out.

“While not finding evidence of cross-industry misconduct, ASIC’s review identified issues of conern in relation to higher claims denial rates and claims handling procedures,” ASIC said.

In a related probe, ASIC’s has obtained about 60,000 documents and has interviewed a range of people as part of its investigation into Commonwealth Bank’s CommInsure.

ASIC said it will work with the Australian Prudential Regulation Authority and insurers over 2017 to establish a public reporting regime that details claims outcomes and dispute levels.

“To improve public trust, there is a clear need for better quality, more transparent and more consistent data on life insurance claims,” it said.

Industry Super Australia chief executive David Whiteley said the recommendations were a step in the right direction, but that government should ban all sales commissions on life insurance.

“Given the importance of life insurance to Australians, the government and industry need to ensure that financial advice is only in the interests of consumers and all conflicts of interests are removed,” he said.

Law firm Maurice Blackburn principal Josh Mennen said an enforceable code of conduct and a Royal Comission were the only credible options for reform.

“The report identifies that particular insurers remain a problem, but does not identify specific insurers against its findings,” he said.

“The public has a right to know who the worst offenders are.”

ABA Consults On Whistle blower Protection

The Australian Bankers’ Association has today opened public consultation on how banks can better support and protect staff who call out poor behaviour that harms customers.

“Customers expect banks to have a strong culture – having a robust and trusted framework for staff to raise concerns is an essential part of this,” ABA Chief Executive Steven Münchenberg said.

“As part of the industry’s six point reform plan, banks are implementing the highest standards of whistleblower protections,” he said.

“The ABA has developed draft principles on how banks can strengthen their existing whistleblower programs, based on an analysis of international best practice standards done by Promontory Australasia.

“In the interests of transparency, we are inviting interested parties to provide their feedback on these principles,” Mr Münchenberg said.

The principles outline the importance of the ‘tone from the top’, with the board and executive management championing whistleblower policies, and how protections can be extended to third parties, such as consultants and suppliers.

They also aim to ensure whistleblower programs have clearly defined ways for people to report misconduct, knowing they can remain anonymous and won’t be financially disadvantaged.

To make a submission on the draft principles, email submissions@bankers.asn.au by close of business Wednesday, 2 November 2016.

The draft principles are expected to be finalised by the end of 2016, with banks required to ensure their whistleblower policies and programs meet the highest standards by July 2017.

“If staff are confident to speak up about misconduct and unlawful activity, they can save customers and the bank a lot of pain later. It can take courage to stand up and call out poor behaviour, so we should support people who do that,” Mr Münchenberg said.

“We need to break the ‘us versus them’ mentality; whistleblowers make an important contribution to our businesses.”

The ABA conducted some preliminary consultations with regulators and other stakeholders in developing the principles.

The principles and the Promontory Australasia report on best practice whistleblower standards are available at betterbanking.net.au.

CBA Announces New Chair

The Commonwealth Bank of Australia today announced its new Chairman will be current non-executive director Ms Catherine Livingstone. Current Chairman Mr David Turner will retire from the Board at the end of December 2016.

Mr Turner has been a member of CBA’s Board since 2006, and has served as Chairman since the beginning of 2010.

Commenting on his decision to retire from the Board, Mr Turner said “I have greatly enjoyed my time on the Board of the Commonwealth Bank and especially as Chairman for the past seven years. It has been a privilege to work with an exceptional Board and management team.

“The strength of CBA meant that following the Global Financial Crisis it was able to continue supporting its customers, accelerate innovation and fulfil its vital role in the broader Australian economy. It has been exciting to be Chairman of the Bank in such a fast changing environment.”

Ms Catherine Livingstone has been a non-executive director of CBA since March 2016. She was formerly Chairman of Telstra Corporation and Chief Executive Officer of Cochlear. She is presently President of the Business Council of Australia and will retire from that role in November 2016.

Mr Turner said “Catherine’s strong business experience complemented by her interest in technology and innovation will mean she will be an excellent and well-qualified Chairman.”

Ms Livingstone said “It is an enormous honour to be appointed Chairman by the Board of the Commonwealth Bank of Australia.

“David will be stepping down from the Board with a legacy of firm and decisive leadership, but always bringing a sense of compassion and humility to any discussion. His relentless focus on long-term investment in the Bank has also been coupled with a passion for driving diversity and positive community impact. I look forward to working with the Board and the very strong management team to continue this focus.”

NAB System Down, Strike 3!

NAB just reported a third system problem in the last week. At Tuesday 11:45am 11 October 2016 NAB spokesperson – on behalf of NAB said:

“NAB is experiencing outages to some of our services.

“This is affecting Internet Banking and the processing of some customer payments.

“Our ATMs are available and customers can use their cards to make purchases in stores.

“We’re doing our best and we’ll work with you through our branches and our contact centre.

“Our teams are working hard to resolve this and we’re sorry for the impact this is causing.

“We’ll continue to provide customers with regular updates.”

Why the Aussie banks have you in a headlock

From Yahoo7 Finance, By David Taylor. The bosses of the big four banks fronted a parliamentary inquiry last week. What for? Well actually nobody really knows.

Of course there is a shopping list of consumer gripes that have led to this inquiry. Such items include the banks not passing on Reserve Bank interest rates cuts, obscenely low term deposit rates, and ‘bad behaviour’ (including allegations that banks aren’t playing fair with services like insurance and the like).

But wait there’s more. There are also question marks around the very culture within the banks. Traders within the banks’ treasury departments have been accused of rigging markets, and doing it in a ‘cowboy’ manner.

The well-payed CEOs of the banks fronted the parliamentary committee and basically said ‘yes, we’ve made some mistakes, we can do better, but there’s nothing seriously wrong with us’.

That is of course true, but it doesn’t really address why we’re having a banking inquiry in the first place.

A banking analyst contact of mine, Martin North, from Digital Finance Analytics, called the whole expose a “sideshow”. And that just about sums it up. The right questions were raised and the predictable answers were given, but the real issues weren’t touched on, nor were they resolved.

The big issue, as far as Martin North, and myself, are concerned is competition.

Competition – or lack thereof

The lack of competition in the banking sector helps explain the record profits in the billions of dollars. It also helps explain why you won’t get the full benefit of the Reserve Bank’s interest rate cuts.

The fact is Australia has a concentrated financial sector. Four big commercial banks control the financial services sector. In addition, there’s a lot of double up in terms of the services they provide, including wealth management and insurance.

The insurance space, and the questionable culture within it, was exposed this year. A “sales culture” — where banking employees simply want to achieve sales targets, sometimes at the expense of common sense (as exposed in the CommInsure scandal where the bank was shunning payouts that seemed fair), has led to an increasing amount of community anger directed at the sector.

Who’s the boss?

So if the big problem with the banks is the lack of competition, and the “moral hazard” that’s created by an awareness that they’re too big, or too important, to fail, then who’s responsible for fixing that?

The answer is no one knows! Quite literally! It doesn’t really fall under the Australian Securities and Investments Commission’s charter, nor does it fit onto the Australian Prudential Regulation Authority’s to-do list. And the Australian Competition and Consumer Commission isn’t the right agency to deal with it either.

That’s probably why there have been calls for a banking Royal Commission – an independent body to tackle the sector’s festering problems.

Whatever scrutiny eventually falls on the industry, the banking sector has now become political. Make no mistake about it. There’s growing community anger about their shenanigans and the public wants to see some blood.

There were some ‘apologies’ from bank chiefs this week including what seemed to be a very rehearsed line from one CEO who said something along the lines of, “we identify problems, we fix them, and we learn how to improve”. The problem of course is that the problems appear, and I want to emphasis “appear”, to be systemic. One politician described the responses he was hearing as just “spin”.

Banking culture

Now bank bashing aside, it’s important to take a step back and look at these Australian financial institutions objectively. Why do certain employees behave the way they do?

I’ve worked for one of the big four banks and I can tell you it’s an incredibly competitive environment or culture. The hurdles just to gain entry into the bank are sizeable and, once you’re in, you’re subject to strict performance measures.

You see banks aren’t charities. They’re hungry businesses. They want your money and they want to make money off your money. There are few “sensitivities” in this equation. Sure they have a responsibility to the community, but their top priority is the shareholder. Second to the shareholder are the bank’s customers, and then the broader community.

The cliché rate cut

One of the biggest pet peeves of the banking sector (from the broader community) is that the big four haven’t been passing on the full 25 basis point interest rate cuts from the Reserve Bank. One bank chief told the inquiry this week that the Reserve Bank doesn’t really dictate interest rate decisions for the commercial banks and that a bigger determinant of interest rates was the rates on offshore wholesale markets.

Be that as it may, I’d suggest that the pressure to pass on interest rate cuts to customers will only grow in the coming months as the Reserve Bank considers its position. Eminent economist, Warren Hogan, told me last week that the “level of crisis” around the Australian economy was not fully understood and that rates would stay “very low for a long time”.

The pressure on the banks isn’t going to let up.

Not all bad

It’s important to recognise though that the line the banks have been running in recent years: that ‘healthy profits produce stronger economies’, is not actually that far from the truth. As former Treasurer Peter Costello recently reminded us, it’s far better to have a very profitable banking sector than a banking sector that’s in financial trouble.

The problem at this point is that they’re considered a little too profitable. Banking analyst Martin North described their current profits as unreasonable.

Bottom line

The bottom line is that banks’ profits are being squeezed by all sorts of extraordinary forces at the moment. The industry though is as tough as they come, and those high flyers at the top are going to do everything in their power to keep those “returns on equity” as high as possible.

Last week’s Banking Inquiry was the sort of inquiry you have when you’re not having a Royal Commission. The bankers have won this round, but I suspect the political pressure will remain, especially if the banks continue to prosper as the economy falters.

David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator.