Tuesday, November 2, 2010

Banks Must Recognise Their Debt To Society

By the time this is broadcast we will not only know the winner of the Melbourne Cup, but we will also know whether or not the Reserve Bank has decided to increase interest rates. At the time of writing, the widely held expectation is that the Bank will leave the 4.5% cash rate untouched, but the much more important question remains just what will the big retail banks do in response? In recent weeks they have been making more noises about the increasing costs of funding and the supposed need to set interest rates independently of the Reserve. While treasurer Wayne Swan has asked for the 31st time for the banks to behave responsibly and exercise restraint, shadow treasurer Joe Hockey has attracted some flak of his own for daring to suggest that the parliament should do something to act against banks colluding on interest rates.

Much of the criticism of Joe Hockey centred around an assumption that he was proposing some sort of reintroduction of regulated interest rates, which is not actually what he said. But interestingly, the Daily Telegraph has today published the results of a survey by Essential Research which shows that 82% of respondents are in favour of the government forcing banks to keep their interest rate increases in line with the Reserve Bank. 91% supported regulations which would restrict fees to no more than the actual cost of services, and 84% wanted the salaries of bank executives to be capped.

The fact is that none of these measures is likely ever to happen because re-regulation of the financial markets is not on the agenda of either major party. But there is a significant difference between that kind of market regulation, and reasonable, effective regulations pertaining to corporate governance and marketplace behaviour. It is that type of appropriate regulation which is supposed to be designed to prevent the kind of excesses and stupidity which occurred elsewhere in the world and contributed to the Global Financial Crisis. And that same regulation should protect consumers from being gouged.

But there is another reason why there is room for greater supervision of the banks. While it is only right and proper for private enterprises, including banks, to make their own commercial decisions, the fact is that banks are more than just private enterprises. They also provide an essential service which is not only an integral part of the economy, but forms the fundamental platform for our economy. Moreover, during the Global Financial Crisis the taxpayer stepped in to provide a guarantee for our banks. They now have a firm basis from which to conclude that they can always rely upon the taxpayer to underwrite their existence. On that basis alone it is clear that banks now have a duty to consider not only their own interests and the interests of their shareholders, but to also to consider the national interest.

They owe us all at least that much.

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