The Global Financial Crisis (GFC) started out as the subprime disaster. Understanding that is important later in the story. So, very briefly, here are the significant bits: a large industry developed around writing dodgy loans, sold using pressure-cooker predatory lending, by unscrupulous lenders – none more so than Bank of America's Countrywide Financial.

When that was not enough, banks, including Bank of America, engaged in document fraud on an industrial scale (something Commonwealth Bank employees dabbled in too). Those dodgy loans were sold in baskets called CDOs. Those CDOs, like drops of poison, were sold in the hundreds of billions of dollars worth to banks all over the world. In that way market misconduct and malpractices in the US home loan market became the subprime disaster, which then metastasised into a financial firestorm that swept the globe.

The point is, dodgy dealings and an unethical culture in the banking system can create catastrophic, national and international problems. One only has to look at the banking system disasters in countries such as Ireland and Iceland to see the impact that misconduct by bankers can have on real economies.

New rules

In response to having to bail out banks after the GFC, the world's major economies have moved to write new rules, and we've followed those developments here in Australia. But these new rules, rules that relate to technical criteria, like levels of retained capital, have their limits. If they're too stringent, we strangle our banks. But wherever we set those limits, banks push back against them, and sometimes with considerable success.

The regulations we enact to control the conduct of our banks are policed by ASIC and APRA. Those organisations face enormous challenges, and for whatever reason – be it lack of resources as they would have us believe, or be it poor performance, as their critics would have you believe – those organisations have had limited success at their jobs.

Under ASIC's nose financial advice scandals, at ANZ with Opes Prime and later at Commonwealth Bank with Storm Financial, were allowed to rot and fester for years. That included 18 months during which whistleblowers, at considerable personal risk, provided ASIC with documentary evidence of what had been going on, and which ASIC ignored. Only after Adele Ferguson – a one woman regulator and Fairfax journalist – had the story explode in the press, did ASIC get cracking.

Huge task

Set against that performance is the sheer, gargantuan size of the job ASIC has to do on a daily basis. ASIC is not only the regulator of conduct in the financial services sector, it is responsible for policing legislation that runs to thousands of sections, across every incorporated entity and company in this country.

When companies such as Dick Smith or those run by Clive Palmer have a problem, who gets called? ASIC. And as their in-tray gets filled up, their resources gets cut by government. Last year the federal government cut $120 million out of ASIC's budget, and so its chairman, Greg Medcraft, conceded on ABC Radio on Tuesday that pro-active surveillance is out, they don't have the money.

So we need to accept the limits of what our regulators can achieve through regulation. And in the face of the cultural and ethical failings that we have seen recently with Commonwealth's financial advisors and the allegations against ANZ and Westpac for rigging interest rates, it would be fair to ask, before we have our own subprime disaster, what can we do to improve the conduct of our banks? And how can we identify and weed out those who lied and cheated in the past?

Because asking those questions – how to improve the culture of our banks, and who did bad things in the past – will involve asking for information that may be incriminating. The people asking the questions, in order to arrive at credible answers, will need the power to compel those answers. That typically would be a royal commission.

Banks worried

Banks, of course, are worried. There can be no doubt that practices have arisen that they don't want aired. So they're pushing back. They claim it would be a distraction.

But being held accountable should never be regarded as a mere distraction. Moreover, we shouldn't be duped into thinking we are not allowed to hold to account the same banks that we, as taxpayers, are called-upon to underwrite.

Our federal government supported our banks during the GFC using taxpayer's funds. That gives taxpayers the right to inquire. Moreover, because tens of thousands of consumers were affected by the financial advice scandal, and because every person in Australia would have been affected by interest rate rigging, and because it appears our duly appointed regulators have struggled to get on top of these scandals, we not only have a right to inquire, we have a duty.

The Turnbull government has stated we don't need a royal commission because we just completed the Financial System Inquiry (FSI). But that inquiry was almost entirely macro-prudential, and concerned with long-term economic and competition issues. It did not look at the conduct of individual banks, or investigate ethical and cultural failings at all.

The second argument the Turnbull government puts forward is that we don't need a royal commission because we have regulators to do this job. But that's exactly the point: we need a royal commission precisely because the regulators are not doing their job.

Big cost claim

Banks, through their chief lobby group, the ABA, says a royal commission will be hugely expensive, and that taxpayers should not have to pay. Fair point, and one we concede. Taxpayers should not have to pay. Obviously someone must pay, and in light of the fact that this commission would be called to investigate long-standing malpractices by banks – banks that have had notice of these issues and failed to resolve them – it seems only fair that banks should have to pay. Perhaps by way of a special levy?

Last year, the big four banks posted record profits totalling more than $30 billion after tax, and a banking inquiry costing about $50 million over two years would be less than 1/10th of 1 per cent of that profit. When the smoke clears, we will find that this number will probably be a lot less than the profits gained from manipulation of the BBSW benchmark over many years. Money well spent if it prevents another scandal.

Fundamentally the problem remains: we have banks that have allowed behaviour to go on which in certain circumstances is criminal; much is unethical; tens of thousands of Australians have been left devastated. Our regulators have failed to effect real, deep, cultural change in our banks. The FSI's findings are not relevant. The banks are wealthy enough to afford, and are deserving of, footing the bill for a royal commission. Cultural deficiencies, malpractices and scandals in Australia's banks, if anything, have spread. Those kinds of malpractices can cause financial crises, which are almost always borne by taxpayers. The best solution to finding a solution to all this is a royal commission. Even banks will benefit from the opportunity to clean house. There really is very little against the idea.

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