Peter Costello’s blast at the banks: bring in some competition

The Australian 12:00am August 19, 2017

Adam Creighton

 PETE WANTS THE BANKS TO KEEP THEIR FREEDOMS AND KEEP RIPPING OFF THE PEOPLE..........................

Peter Costello, the architect of Australia’s financial regulation, has slammed the big four banking “quadropoly” as “absolutely immun­e from market discipline”, and raised the prospect of elimin­ating foreign ownership caps as a way of injecting sorely needed competition into an industry ­dogged by scandals.

The nation’s longest-serving treasurer and current chairman of the $130 billion Future Fund said the chief executives of the big four banks should admit they were ensconced in a highly profitable “cocoon” as a result of government regulation that would be the envy of even regulated power utilities.

“They think all these high returns­ are from their own brillianc­e,” Mr Costello said.

“But what they haven’t understood is they have a unique and privileged regulatory system which has delivered this to them.”

He stressed that the big four in particular had “enormous advant­ages”.

“Because they can’t be taken over, because they can’t merge, because they have a government guarantee … the best analogy (for them) is regulated assets,” he said, referring to privatised electricity grids that have caps on their rates of return.

“And even here they have an amazing advantage because regul­ated infrastructure can be subject to foreign ownership, as we’ve seen that in NSW.

“The banks have no cap on their rate of return — it’s a great business!”

He stressed that he was advoc­at­ing removing barriers to compet­ition, not further government meddling.   

Australian law prevents ­foreign individuals from owning more than 15 per cent of an Australian bank without approval by the treasurer.

In a wide-ranging interview with The Weekend Australian to mark 10 years since the global fin­ancia­l crisis began in Europe, Mr Costello said a decade of feckless fiscal stimulus, rising public debt and deficits had tarnished Australia’s international reputation.

“As a country we’ve lost lustre, the Treasury has lost lustre and the RBA for that matter,” he said.

His comments reveal a dim view of the central bank’s current ultra-low interest rate settings that have pushed house prices to record­ highs. “Australia is now just another country in deficit fighting to increase growth,” he said.

He suggested the political class had given up on even talking about micro-economic reform — “labour­ markets, tax policy, welfare­ incentives” — because it no longer saw rewards at the ballot box. “Ten years ago, if an Australian PM or treasurer went to an international conference — say G20 or IMF or OECD — and was asked to contribute, they would tell this story: countries can balance­ budget, they can pay back debt, they can reduce taxes and engage in microeconomic reform.”

Mr Costello — the chairman of the Future Fund since 2014, having created it as treasurer in 2006 — was sanguine about China’s economy, pointing out it had been a relative rock of stability in the 1998 and 2008 global crises, but critical of the Fed’s quantitative easing and ultra-easy monetary policy in Australia.

“It’s like the Hotel California, you can check out but you can never leave,” he quipped, foreshadowing a problematic fall in asset prices when interest rates eventually rose.

His comments about the financial system come at a delicate time for the banks, especially the Commonwealth, which last week delivered a record $9.9 billion profit only days after Austrac accused it of more than 53,700 breaches of money-laundering and counter-terrorism-financing rules.

The remarks could be seen as a fundamental attack on the big four banks’ claims to be efficient, free-market businesses at a time when the Turnbull government is trying to fend off the Labor Party’s call for a royal commission into the banking system.

The government has announced a flurry of pro-competition banking reforms since May, including creating an “open banking regimen”, scrapping the legislative 15 per cent ownership cap and lifting the prohibition on the term “bank” for smaller financial institutions.

Mr Costello said the government was aware of the lack of competition. “Whether you split (them) up or encourage new entrants, I think we need more competition in the banking system,” he said. “The other thing you notice about banks in Australia is their business lending is negligible.”

Mr Costello, who served as treasurer in the Howard government from 1996 to 2007, set up the Australian Prudential Regulation Authority in the late 1990s. Around that time he dismissed a recommendation of the Wallis inquiry­ into the financial system to disband the “four pillars” policy.

“I introduced four pillars so I’m not arguing against four pillars. (But) you might say, for example, in the interests of competition, we might look at foreign investment in a bank in Australia. You might get an entrant that runs it more efficientl­y. You might get a bit of market discipline.”

Mr Costello said the big banks’ share of the Australian stockmarket’s value, about 25 per cent, ­necessitated investment abroad. As of March, only 6.5 per cent of the Future Fund’s assets were invested­ in Australian equities — a far lower share than retail super funds, which had 28 per cent.

He also took a veiled swipe at the accountability of major bank boards, suggesting compulsory superannuation had largely insul­ated them from market punishment. “There’s never any financial fallout from a scandal. The boards, they are there, nobody ever gets voted off a bank board.”

The CBA board announced this week, in an unprecedented move to restore confidence in the nation’s biggest company, the ­departure of chief executive Ian Narev before July next year, having­ slashed his and the other top 11 executives’ bonuses as part of an “enhanced framework … to support the ongoing consideration of risk and reputation”.