Financing risk into economic growth
4 April 2016
http://www.afr.com/opinion/editorials/financing-risk-into-economic-growth-20160404-gny8oq
A new era is emerging in financial services, according to the theme of The Australian Financial Review's second annual Banking & Wealth Summit in Sydney over the next two days and as previewed in today's Financial Review. Two keynote speakers, NAB chairman Ken Henry and Basel Committee on Banking Supervision chairman Bill Coen, suggest that governance and ethics are part of ensuring that our banks are unquestionably strong.
The great irony is that close to a decade of extraordinarily loose – even imprudent – central bank monetary policy since the global financial crisis may itself be sowing the seeds of the next crisis. So the big banks that helped shield Australia from the crisis are being forced to hold significantly bigger capital buffers. That inevitably will flow through to the returns, and dividends, that shareholders can expect from investing in Australia's AA-rated banks. On top of more capital, signs that the banks may have reached the bottom of their bad-debt cycle have hit their share prices. They are facing more competition from "fintech" upstarts attacking parts of their value chain. And, more disturbingly, they have come under more pressure over ethical issues – from financial planning scandals to the CBA's insurance arm to the ANZ traders' alleged rigging of a key market interest rate – that challenge the bond of trust with their customers.
At last year's inaugural Banking & Wealth Summit, the big banks were still putting up a fight over the late-2014 calls from the Financial System Inquiry headed by David Murray that they be made "unquestionably strong" by being forced to hold more capital. But Australian Prudential and Regulation Authority chairman Wayne Byres said he worried about global financial volatility and was inclined to push the banks to move "sooner rather than later". Arguably, the financial world has become even madder in the past year: while the US Federal Reserve has started lifting its official interest rate from virtually zero, the Bank of Japan has followed the European Central Bank into negative official interest rates. Mr Murray himself told last year's summit that Australian bank returns on equity were only holding up because the banks were pumping up mortgage lending, which in turn was continuing to inflate the housing market.
At least a couple of significant things have occurred since then on that score. The big four banks got the message and raised $19 billion of capital between May and October last year. And APRA's late-2014 crackdown on investor lending started to bite. House price inflation has eased; in some areas, such as central Melbourne and former mining boom towns, house prices are falling. As well, the fintech revolution has become hotter, even becoming part of Malcolm Turnbull's innovation push. While the competitive threat to the big banks has increased, the banks themselves are looking to use fintech to get closer to their customers, investing in their own digital start-ups and partnerships.
Reserve Bank governor Glenn Stevens created the biggest headline of last year's summit when he warned that retirees should adjust their expectations for an extended period of historically low returns. The reality of an extended lower-yield world has further highlighted the shortcomings of Australia's compulsory retirement income system. In the past month, the Turnbull government has adopted David Murray's call to define the purpose of tax-preferred superannuation as being to provide an income in retirement rather than as to be a vehicle for wealth generation and bequests.
The other key issues confronting banking – governance, ethics, digital competition – also confront superannuation. Together, however, the two pillars of Australia's financial system need to confront the central issue, identified at The Australian Financial Review Business Summit last month, of how business can take the appropriate risks to generate economic growth and prosperity. As the financial crisis highlighted, financial systems should be all about spreading and managing risk. In doing so, they also need to be about promoting growth.
Read more: http://www.afr.com/opinion/editorials/financing-risk-into-economic-growth-20160404-gny8oq#ixzz44ts4DEzf
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