Wednesday, August 11, 2010

Profits Are Not Obscene, But Bank Behaviour Can Be

It’s no great surprise that the Commonwealth Bank has announced a profit of just over $6 billion, and it’s equally no great surprise that there has been a rousing chorus of disapproval. Political parties such as Family First and the Greens have chastised the banks for their greed, and consumer groups have denounced the banks for exploiting their customers. Some have called for banks to be subjected to a super profits tax similar to the new Mineral Resources Rent Tax, some have called for bank fees to be banned, and some have called for a cap to be imposed on bank executive salaries. All this and it seems like just the other day we were all congratulating our banks on being robust enough to ensure that we all survived the Global Financial Crisis. So is it really obscene for a bank, or any other business, to clock up such a massive profit?

The short answer is no, but the longer answer is that the means by which that profit is achieved can be. Every business exists to make a profit, which benefits the owners of the business, keeps people employed, and provides goods or services to the community, thus keeping the economy going. Big profits alone are neither obscene, nor virtuous. What matters is the ethical treatment of all involved, including shareholders, employees, customers, and the community generally. What matters is whether the customers are served in their best interests, or they are gouged and exploited. What matters is not that a profit is earned, but whether it is fairly earned. On that basis, the profits themselves are not obscene, but the manner in which we are all taken for a ride could well be.

The success of the banks overall is good for the community, and good for economic stability, but at the same time the sheer size of the profits would seem to indicate that the banks can also afford to behave in a manner which is socially and morally responsible. It is the manner in which the profit is earned which bothers me. It is the endless array of excessive fees and charges for items which should rightly be an overhead of the business, such as ATM fees which charge people for the privilege of accessing their own money. It is the predatory practices encouraging customers to take on more debt than they can reasonably afford. And it is the reward offered to executives for pursuing such amoral practices.

There’s no need to put a super profits tax on banks, just a reasonable regime of regulation to outlaw unconscionable practices. If an institution can make a big profit and behave honourably at the same time, then they should be welcome to the rewards. But if they abuse their market power to disadvantage their own customers, their own employees, and the community at large, then they deserve to be punished. Only proper regulation, designed to foster a system which empowers and enriches all the stakeholders, can achieve that. Sensible regulation which defends the rights of consumers does not have to stop the banks from making big profits.

It just has to stop them from making big profits by unfairly taking advantage of the rest of us.

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