The news that banks have dramatically increased their fee income yet again will come as no surprise to most of us. Less significant in macro terms, but far more drastic for those affected, has been the atrocious practise of selling tiny debts to loan sharks, who will then sell people’s houses from under them at sheriff’s auctions. Given that these institutions exist only by the grace of the Australian government, it’s time to give them the same kind of message that Telstra received recently.
It’s time to offer the banks an offer they can’t refuse (unless they’re feeling lucky). Either withdraw entirely from the prudential regulation system, and stand on their own credit, or accept the fact that the public, as the residual risk-bearer, is their ultimate owner, and act accordingly.
To spell out the first option, the government should offer all the Australian banks the option of replacing their existing guarantee with the opposite – a guarantee that under no circumstances will Australian taxpayers bail them out, make good their obligations to depositors, or permit either the Reserve Bank or taxpayer-guaranteed financial institutions to extend them them credit or support of any kind. A window of, say, twelve months, should be announced during which the government will make depositors whole in the event of a failure, necessitating takeover of the bank in question (of course, with the shareholders wiped out and the directors and senior management subject to all available legal penalties). After that, the depositors, counterparties and creditors would be on their own. My estimated survival time for a bank choosing this option would be measured in hours rather than days, but as I say, they might feel lucky.
In the second option, taxpayer-guaranteed banks should have all their rates and charges determined by regulation, with the objective of ensuring shareholders a return comparable to the government bond rate. Salaries should be set in line with comparably responsible positions in the public service. Lending practices should be controlled to ensure acceptable risk levels.
Banks should be boring public utilities, offering safe and steady, but not particularly well-paid jobs. Anyone who wants to be a financial speculator should do so without public backing.
Update On reflection, my second option is a bit too prescriptive. It’s obvious, looking at the global economy, that the financial deregulation that took place in the 1970s and 1980s has been a failure, and the primary cause of the current crisis. Australia’s relatively mild exposure (so far) has been as much by good luck as good management. So we need a fairly comprehensive re-regulation which ensures that banks fulfil the role of a public utility. But whether the kind of price-cap regulation applicable to other utilities would be the best model remains to be worked out.