Everybody pays when the banks get too powerful

As a political debate rages around the power of the major banks, Mike Taylor writes that far more is at stake than just home loan interest rates.

Australia’s major banks are arguably amongst the most profitable and resilient in the world.

There can be no disputing this contention in circumstances where, over the past few weeks, they have with rare exceptions posted profit increases of well over 50 per cent.

The results are largely a product of recovering markets, but they are also a reflection of the privileged position enjoyed by the banks resulting from the Commonwealth Government’s bank deposit guarantee.

Recovery in the wealth and funds management sectors have proved healthy contributors to the banks’ bottom lines with Westpac, the Commonwealth Bank and National Australia Bank all making flattering references to their wealth management divisions (BT, Colonial First State and MLC, respectively).

It is a further reflection of the privileged and increasingly powerful position enjoyed by the big banks that while Australia’s publicly listed financial planning dealer groups arguably did well last financial year, reporting solid profitability, they did not do as well as the major banks.

The banks’ profits rose between 50 and 84 per cent, but those of the dealer groups hovered around the 25 per cent mark.

It is worth, then, reflecting upon the degree to which the initial implementation of the bank deposit guarantee helped the banks and acted to distort specific markets in Australia — not least the operation of mortgage funds, many of which were frozen as the responsible entities acted defensively in the face of a rush by investors to shift their funds into the ‘protected’ area of bank term deposits.

The bank deposit guarantee was introduced by the Government at the onset of the worst of the global financial crisis in October 2008. It was only finally removed with respect to large deposits and wholesale funding in March this year.

It is a reflection of the impact of the bank deposit guarantee and the advantage it handed the major banks that only last week the Challenger Financial Services Group broke new ground by gaining investor support for its Challenger Howard Mortgage Fund to resume commercial lending.

In other words, after being impacted in 2008-09 along with many other mortgage funds, the Challenger fund in the closing months of 2010 gained sufficient investor approval to resume virtually normal operations, including allowing unfettered withdrawals by unitholders.

Challenger’s joint chief executive for funds management, Rob Adams, said he believed the fund was the first mortgage trust to fully resume commercial lending in a market where credit spreads remained significantly elevated.

Just hours after Challenger’s announcement with respect to its Howard Mortgage Fund, Westpac chief executive Gail Kelly announced her bank’s 84 per cent increase in profit at the same time as making reference to Westpac’s growth in the mortgage market and the almost complete finalisation of its merger with St George.

All of the above is important in the context of the debate currently underway in the financial planning industry and suggestions that the Government’s Future of Financial Advice changes will have the effect of enhancing the market position of the major institutions at the expense of independent dealer groups and smaller planning practices.

The debate about the way in which the big banks have leveraged their privileged position in difficult times to grow their share of the wealth management and mortgage markets has also come at a time when there are those in the financial planning industry arguing that the banks and other financial services institutions were less than wholehearted in helping the financial planning industry counter the anti-planner rhetoric of the Industry Super Network.

The Federal Treasurer, Wayne Swan, has used the public angst surrounding the lifting of interest rates by the major banks to announce the Government will be acting to impose legislative and regulatory measures to “rein in the banks”.

However, nowhere in the Government’s rhetoric has there been any suggestion that the Commonwealth will be looking at the way in which bank dominance has impacted other sectors of the financial services industry, including financial planning.

Swan has acknowledged that there are no easy answers with respect to the problem of bank dominance, and the recent efforts of the Australian Competition and Consumer Commission in blocking National Australia Bank’s acquisition of AXA Asia Pacific should have reinforced just how much complexity exists.

Indeed, it is entirely possible that if Westpac had lined up in 2010 to acquire St George it, too, would have found itself being rejected.