How the big banks are getting bigger
The Australian 12:00am June 14, 2017
Adam Creighton
Australia’s finance sector has grown to be the largest share ever of the economy, bigger even than those of the US, Britain and Canada before the 2008 global financial crisis, prompting top economists to question whether the growth had been beneficial.
The financial services and insurance sector, one of 19 sectors whose “gross value add” the ABS tracks every three months, had increased to 9 per cent of GDP for the first time ever, more than that of retail and wholesale trade combined, according to last week’s national accounts.
Kevin Davis, professor of finance at Melbourne University, said he was worried that “too much of our valuable resources had been invested in the financial sector”, pointing to studies overseas that showed banking could be a drag on economic growth.
Helped by compulsory superannuation, finance’s contribution to economic output, the ABS finds, has steadily increased from 4 per cent in the early 1980s, overtaking manufacturing (now 5.6 per cent) in 2006, and putting it far ahead of the next biggest sectors — construction (7.6 per cent), health (7 per cent) and mining (6.9 per cent).
“It’s not clear that things like trading and asset management in particular necessarily add value, unlike more standard intermediation of depositors and borrowers,” Professor Davis said.
Sally Loane, chief executive of the Financial Services Council, yesterday defended the sector’s stellar growth, highlighting the 420,000 workers it employed. “This expertise is something to be celebrated, especially as the economy continues its transition from being mining-led to being services-focused,” Ms Loane said. “The financial sector is going to be at the centre of extending Australia’s record-breaking run of 26 years without a recession.”
Separate ABS data shows financial brokers, dealers and investment managers have more than tripled their shares of the workforce.
Former Reserve Bank board member Bob Gregory said finance’s growth was unusual and warranted serious attention. “To beat up on banks seems to trivialise what’s going,” he said, suggesting most would find it remarkable that almost $1 in $10 was being spent on finance.
In a famous article in 1984, economics Nobel Laureate James Tobin argued that banking was becoming too large a share of the economy: “We are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services … that generate high private rewards disproportionate to their social productivity”.
The Reserve Bank has co-ordinated a new global code of conduct for traders, released last month, to try to reduce the incidence of fraud and gouging, which has led to more than $US320 billion ($424bn) in fines being levied on large banks worldwide since the GFC.
“I think part of the reason for its growth is that there is potentially lots of money to be made by bright people at the expense of others,” said Professor Davis, the chief economist on the government’s 2014 financial inquiry.
Ms Loane said: “Local fund managers and superannuation providers are already gaining a reputation as world-class investors, owing to the highly competitive and stable market provided by the compulsory superannuation system.”
The financial services sectors of the US, Britain and Canada each represent less than 8 per cent of their nation’s respective GDPs, a little below their sizes before the 2008 crisis.
Arts and recreation, another sector tracked, lifted its share by only 0.1 percentage point of GDP since the 1970s, to 0.8 per cent.