It promises to be a dog fight Royale. The four big banks can be expected to behave like uncontrollable Pit Bulls, determined to savage Senator Hanson’s Banking System Report (Separation of Banks) Bill 2019. This Bill is about re-establishing confidence in the banking system by separating ‘core banking’, called retail and commercial banking where deposits are protected, from the risky wholesale and investment banking.
By Patricia Warren, Byron Echo Vol 33 #40 March 13, 2019 p21
By default the recent Haynes Royal Commission has brought focus on how banks are currently structured to do business. It’s their power base and they will fight to defend it. Fur will fly because bankers do not want a firewall between deposits and the flow of these into their trading activities. Bloodletting can be expected should this Bill stand in the way of using your money to cover their gambling in high return investments, including derivatives.
Learned from the GFC?
People are reminded that it was the collapse of the derivatives market that brought about the Global Financial Crisis 2007/08. Nothing has been learned. In December 2018 “The notional value of the derivatives cleared worldwide is 4.4 times world GDP, up from 2.8 times in 2008.” While not all derivatives are evil, it is estimated that Australian banks are currently exposed to more than $37Tr in derivatives and billions in short term debt. The global derivatives markets are vast, unregulated, some deliberately untraceable in off-shore entities and commonly off the books. Currently, there is potentially US$540Tr of global derivatives set to ignite a global financial crisis.
Divorce time
The idea of separating core banking activities from the higher risk investment banking is not new. Leading financial commentator, Alan Kohl wrote of his random sampling of 10,140 submissions to the Royal Commission, “ Without exception they called for the banks to be broken up and most of them, surprisingly, used the term ‘Glass Steagall’ suggesting that the now-repealed American law that used to forcibly separate banking from insurance and investment banking be introduced into Australia”. Hanson’s Bill has been crafted after the Glass Steagall and modified to suit the Australian conditions.
There is widespread support for the breaking up of the banks, including that coming from former CEOs of major banks, academics and former Prime Minister Paul Keating. In fact, there are now more people supporting the breakup of the banks since the Royal Commission than before it.
The banks are powerful and effective lobbyists exercising undue influence not only in the market place where they work like an oligopoly but with both major political parties to which they reportedly have donated $2.6m. Their relationship with Treasury and the regulator, Australian Prudential Regulatory Authority (APRA) has been described as ‘incestuous’.
Currently there is approximately $2.8Tr held in deposits as unsecured loans in Australian financial institutions of which over 80% is concentrated in the four big banks. Banks are currently paying very little interest on deposits whilst using a significant proportion of funds to trade in high risk areas.
BAIL IN
Under Australia’s BAIL IN legislation, where there is no explicit exclusion of deposits in the law, deposits are exposed to cover the gambling risks of financial institutions in times of financial crisis in the global system. So, if the derivatives market collapses, as it did in the GFC, then cash will be used to BAIL IN and stablise failing global institutions be it from peoples’ term deposits, business operating and superannuation fund accounts. Politicians have refused to amend the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (FSLA) to exclude deposits from this and hence are protecting the bankers and their risk taking behavior.
Deny Risk
CEO’s of the major banks and other leading financial institutions deny that deposits are at risk. They argue they are controlled by APRA’s prudential standards and that ‘currently’ and ‘as the legislation sits’, only ‘capital instruments’ can be called upon to stablise a failing institution. But APRA can change this under the secrecy provisions of the FSLA to capture deposits as part of BAIL IN. There is a loop hole which allows APRA to change its standards to include ‘instruments’ ‘that are not currently considered capital under prudential standards.”
Failed Gatekeeper
No CEO responded to concerns raised directly with them months ago about that provision. Nor did APRA! APRA has failed as the gatekeeper on our financial system.
APRA takes recommendations directly from the International Bank of Settlement (IBS). This means our financial institutions are influenced by the motivation of the central bankers to protect the global financial system above depositors.
Under the Banking System Reform (Separation of Banks) Bill 2019 it is intended to break that direct connection. Instead, APRA must not only come before an Australian parliamentary committee for “prior express written approval and consent” to act before implementing any recommendations or decisions of any foreign bank, or foreign authority but have Parliamentary approval to change its prudential standards for the purpose of regulating our financial institutions.
Public Inquiry
Parliament’s Senate Standing Committee on Economics is currently holding a public inquiry on the Bill and calling for submissions. It is a numbers game and broad based support of the Bill is needed to counter what can be expected from the banks, Treasury and APRA.
Submissions need only read: I support the Banking System Reform (Separation of Banks) Bill 2019 and I support the separation of retail commercial banking activities involving the holding of deposits from wholesale and investment banking as proposed in the Bill. Submissions need to be sent to economics.sen@aph.gov.au or mailed to the Senate Standing Committee on Economics PO Box 6100 Canberra ACT 2600 by 12 April 2019. If you want your cash made more secure then you’re encouraged to make a submission. Alternatively, there is always under the mattress.
