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Are Australia's banks too big to fail? Are Australia's banks too big to fail?
(7 months later)
In December last year Treasurer Joe Hockey announced the terms of reference for a review into the financial system to be headed by David Murray. The inquiry has long been in the gestation. Joe Hockey first mooted the proposal in a speech in October 2010. At the time it was seen as a call to give the financial system a bit of a shake-up after the GFC and see what had served us well, and what should change. But since the release of the terms of reference and the appointment of the members of the panel, a number of commentators are expressing concern that the review will serve to reinforce the status quo and the position of the big four banks.It seems an age ago when Joe Hockey first suggested the idea of an inquiry. Taking the lead from then leader of the opposition, Malcolm Turnbull, Hockey spoke of the concern over risks undertaken by banks and also the concentration of power in the hands of the big four – ANZ, Commonwealth (CBA), NAB and Westpac.Hockey noted that during the GFC, banks such as St George, BankWest were taken over by Westpac and CBA respectively and that Westpac also consumed RAMS while the CBA took over Wizard Home Loans and 30 percent of Aussie Home Loans. NAB took over what was then Australia’s biggest non-bank lender, Challenger.In short, Hockey said, the GFC meant that "the four major banks have largely become the Australian financial system”.A look at the data backs this up.In the 1970s and 1980s, while the banks were dominant lenders in Australia, non-bank institutions were much more prevalent than now. Building societies especially were much stronger forces. At that time the number of home loans held by banks compared with building societies was about 3 to 1. Now it is about 50 to 1.In December last year Treasurer Joe Hockey announced the terms of reference for a review into the financial system to be headed by David Murray. The inquiry has long been in the gestation. Joe Hockey first mooted the proposal in a speech in October 2010. At the time it was seen as a call to give the financial system a bit of a shake-up after the GFC and see what had served us well, and what should change. But since the release of the terms of reference and the appointment of the members of the panel, a number of commentators are expressing concern that the review will serve to reinforce the status quo and the position of the big four banks.It seems an age ago when Joe Hockey first suggested the idea of an inquiry. Taking the lead from then leader of the opposition, Malcolm Turnbull, Hockey spoke of the concern over risks undertaken by banks and also the concentration of power in the hands of the big four – ANZ, Commonwealth (CBA), NAB and Westpac.Hockey noted that during the GFC, banks such as St George, BankWest were taken over by Westpac and CBA respectively and that Westpac also consumed RAMS while the CBA took over Wizard Home Loans and 30 percent of Aussie Home Loans. NAB took over what was then Australia’s biggest non-bank lender, Challenger.In short, Hockey said, the GFC meant that "the four major banks have largely become the Australian financial system”.A look at the data backs this up.In the 1970s and 1980s, while the banks were dominant lenders in Australia, non-bank institutions were much more prevalent than now. Building societies especially were much stronger forces. At that time the number of home loans held by banks compared with building societies was about 3 to 1. Now it is about 50 to 1.
The big change happened with the 1990 recession and the collapse of building societies like Pyramid which mirrored somewhat the then "savings and loans" crisis occurring in America. Not surprisingly, when times got tough, people flocked to the safety of the banks. And so by the end of 1994, banks controlled around 91% of all home loans in Australia. Throughout the 1990s and into the 2000s this figure shrank as wholesale mortgage lenders such as RAMS and Aussie Home Loans came into the market. By the middle of 2007 banks controlled only 78% of the value of the home loan market.Then The big change happened with the 1990 recession and the collapse of building societies like Pyramid which mirrored somewhat the then "savings and loans" crisis occurring in America. Not surprisingly, when times got tough, people flocked to the safety of the banks. And so by the end of 1994, banks controlled around 91% of all home loans in Australia. Throughout the 1990s and into the 2000s this figure shrank as wholesale mortgage lenders such as RAMS and Aussie Home Loans came into the market. By the middle of 2007 banks controlled only 78% of the value of the home loan market.Then the GFC hit.
the GFC hit. Within 18 months they controlled 91% and the latest figures have the banks accounting for 94.1% of all monies loaned to owner-occupier home buyers.
Within 18 months they controlled 91% and the latest figures But while the domination of the banking sector is similar to the situation in the early-mid 1990s, the current dominance of the big four is much greater.According to the Australian Prudential Regulation Authority (APRA) there are 69 banks operating in Australia (admittedly not all take deposits or make home loans), but the big four now control 84.3% of all home loans undertaken by banks and 81% of all household deposits. Ten years ago they controlled less than 75 per cent of both categories.
have the banks accounting for 94.1% of all monies loaned to
owner-occupier home buyers.
But while the domination of the banking sector is similar to the situation in the early-mid 1990s, the current dominance of the big four is much greater.According to the Australian Prudential Regulation Authority (APRA) there are 69 banks operating
in Australia (admittedly not all take deposits or make home loans), but
the big four now control 84.3% of all home loans undertaken by banks
and 81% of all household deposits. Ten years ago they controlled less than 75 per cent of both categories.
And given that in 2002 the banking sector accounted for less of the home loan market than it does now, that means that since 2002 the big four have gone from controlling around 58% of Australia's home loan market to taking up 79.3% today.That's a big chunk of a $16.3bn monthly pie.At this point it won't be all that shocking to hear that ANZ, CBA, NAB and Westpac are all among the five biggest companies in Australia - the only non-bank exception in the top 5 is BHP.And the banks have done exceptionally well compared with other sectors. Over the past 5 years, the financial sector has massively outperformed the resources sector.And given that in 2002 the banking sector accounted for less of the home loan market than it does now, that means that since 2002 the big four have gone from controlling around 58% of Australia's home loan market to taking up 79.3% today.That's a big chunk of a $16.3bn monthly pie.At this point it won't be all that shocking to hear that ANZ, CBA, NAB and Westpac are all among the five biggest companies in Australia - the only non-bank exception in the top 5 is BHP.And the banks have done exceptionally well compared with other sectors. Over the past 5 years, the financial sector has massively outperformed the resources sector.
Now this is not necessarily bad. But it certainly does suggest all four are now in the "too big to fail" bracket.This was once a particular concern of Joe Hockey. When proposed some terms of reference for a financial inquiry in 2010 he noted the context was that: "Since the Global Financial Crisis, the creation of the notion that many financial institutions are now 'too big to fail' has created a policy dilemma for regulators and legislators."He also mooted the idea of Australia Post and Medicare being able to take on some of the role of banking institutions.Now this is not necessarily bad. But it certainly does suggest all four are now in the "too big to fail" bracket.This was once a particular concern of Joe Hockey. When proposed some terms of reference for a financial inquiry in 2010 he noted the context was that: "Since the Global Financial Crisis, the creation of the notion that many financial institutions are now 'too big to fail' has created a policy dilemma for regulators and legislators."He also mooted the idea of Australia Post and Medicare being able to take on some of the role of banking institutions.
As the Australian Financial Review's Chris Joye has noted, the review panel is headed by the former chief executive of the Commonwealth Bank, and also includes a former chief executive of Westapc and former chairman of the Australian Bankers Association, as well as a long time director of Westpac.They are hardly the types who would think the big four being too big is a problem. Indeed, the final terms of reference contained no indication that the size of the big four was a concern, nor did it mention anything about Australia Post or Medicare taking on new roles.Joye has also noted that the decision by Kevin Rudd before the election to impose a 0.5% levy on banks to assist paying for the government's guarantee of deposits was criticised at the time by David Murray and the Australian Banking Association despite being recommended by the Reserve Bank, the IMF and the APRA. Hockey left the decision on whether to proceed with the levy in the hands of the panel.They are set to deliver an interim report by the middle of the year. While it remains to be seen what the review will say, given the welcoming noises from bank lobbyists regarding the appointments and the terms of reference, the hopes of any recommendations which might shake-up the sector and return competiveness to what it once was are slim.As the Australian Financial Review's Chris Joye has noted, the review panel is headed by the former chief executive of the Commonwealth Bank, and also includes a former chief executive of Westapc and former chairman of the Australian Bankers Association, as well as a long time director of Westpac.They are hardly the types who would think the big four being too big is a problem. Indeed, the final terms of reference contained no indication that the size of the big four was a concern, nor did it mention anything about Australia Post or Medicare taking on new roles.Joye has also noted that the decision by Kevin Rudd before the election to impose a 0.5% levy on banks to assist paying for the government's guarantee of deposits was criticised at the time by David Murray and the Australian Banking Association despite being recommended by the Reserve Bank, the IMF and the APRA. Hockey left the decision on whether to proceed with the levy in the hands of the panel.They are set to deliver an interim report by the middle of the year. While it remains to be seen what the review will say, given the welcoming noises from bank lobbyists regarding the appointments and the terms of reference, the hopes of any recommendations which might shake-up the sector and return competiveness to what it once was are slim.