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Wednesday, June 17, 2009

Banks raise fees – Arguments for social banking





In Australia the Commonwealth Bank has raised its home loan interest rates 0.1 percent. At the time of writing, Westpac and the National Australia Bank have ‘followed suit’, raising rates on their fixed interest rate home loans. http://www.abc.net.au/news/stories/2009/06/16/2599124.htm

As John Passant has noted in ‘En Passant’: it is hardly as if the banks were ‘strapped for cash’. Passant notes:

“In the first half of this financial year [the Commonwealth Bank] made $2.5 bn profit (an increase of 9 percent over the previous comparison period).”
http://enpassant.com.au/?p=3665

Furthermore: earlier this year [a report from] Fujistu Consulting…found [that] Australian bank fees were 22 per cent higher than those in Britain and 11 per cent more than US banks. http://www.abc.net.au/news/stories/2009/03/06/2509189.htm

Of course, though, it didn’t have to be this way.

It was the Keating Labor Government which moved to privatise the Commonwealth Bank. In this process, the acquisition of the State Bank of Victoria was used as a ‘Trojan Horse’ for Keating’s neo-liberal privatisation agenda.

The course of full privatisation took place between 1991 and 1996 – and the Australian banking sector has never been the same since.

More recently – in response to the ‘credit crunch’ – and out of dire necessity - Rudd Labor has garaunteed “$600-$700 billion deposits in Australian financial institutions. This was in order ”to shore up local confidence and protect the nation's international competitiveness.”

An unintended consequence, though, has been the marginalisation of independent lenders: to the expense of local competition. Australia’s four major private banks – the ‘four pillars’ – have consolidated their position thoroughly. There are conflicting arguments, here, about the significance of competition.

In a personal exchange with the author, prominent Australian economist Steve Keen has noted that:

"a non-profit-oriented [Commonwealth Bank] would not have been driven by competition to achieve market share into dropping its lending standards. The impact of competition was really to drop prudential standards in order to get the largest share possible of the mortgage market. What can arguably lead to efficiency in a product market leads to lemon lending in a financial one."

Steve Keen believes it to be a “moot point”: but the following can be argued:

If Labor was serious about competition in the banking sector, the wholesale privatisation of public banks would never have taken place. The place of a re-socialised CBA in offsetting potential collusion, and maximising product competition - could be critical.

On the other hand, as Keen has pointed out: competition for financial services can lead to a deterioration of lending standards.

Strong prudential supervision is required to resolve this problem. But also: if vulnerable Australians are therefore ‘shut out’ of the home loan market, government (both State and Federal) needs to take immediate and strong action to build up quality public housing stock. As well as providing directly for vulnerable Australians, by increasing supply downwards pressure could also be applied on housing rental rates.

A tightened rental market in Australia has arisen as a critical problem since the Howard conservative government irresponsibly fostered a housing bubble as an artificial means of buoying economic growth.

Continuing in his critique of competition in the financial services sector, Keen argues that

“competition has led to a compression in the loan/deposit rates, but [also, as a consequence] a growth in fees to gouge existing customers. If we hadn't had this competitive orgy, the loan/deposit gap might have remained larger than today, but consequently the need to gouge customers with fees to compensate wouldn't have been there.”

The logic of Keen’s arguments tends to suggest the desirability of sweeping bank nationalisation. But while this is still theoretically defensible – even preferable - the constitutional barriers to such reform in Australia are set.

Keen may be correct – that competition in itself can have undesirable consequences. But given the current impossibility of across-the-board bank nationalisation: the presence of a public bank could provide competition of a more benign form.

The best short-medium term course of action, therefore, is the re-establishment of a public sector bank – which because of its not-for-profit footing swiftly secures a strong foothold in the market. By doing so, even now Australian Labor could potentially make amends for its past errors: following the example of New Zealand Labor.

The benefits of re-establishing of major public sector bank are manyfold.

A resocialised Commonwealth Bank could move to a ‘not for profit’ footing. Low income earners could be provided with ‘no fee’ accounts. Billions in profits could be directed into abolishing fees; and not moving to repossess houses where families are left vulnerable because of the recession. And equal services could be provided for disadvantaged Australians – including provision of services in rural and regional Australia.

Alternatively, even were such a bank to maintain a ‘profit-footing’, at the least such dividends could be ploughed bank into crucial welfare and public services.

As the recession bites, progressive ideas are needed now more than ever. Hopefully these kind of arguments will gain exposure in the public sphere. Despite the prevailing neo-liberal ideology, there is a sense that the ‘tide could be turning’. The task of building a ‘democratic mixed economy’ is before us. Let us pursue this task with hope and determination.


Tristan Ewins, June 2009-06-17

The author would like to thank Steve Keen for his advice in research for this article.

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