Four pillars bashed but holding firm
Illustration: Miachael Mucci
I have never met Gail Kelly, yet I can see her value as a role model, given she's the most senior woman business executive in Australia. But whenever I see her face my first thought is, ''What did you do with my money?''
I have no debt except for an equity loan that my wife and I took out when a salesman at Westpac persuaded us to take a $100,000 loan against the equity in our house. It would be tax-effective, he said, and the sharemarket offers solid asset growth long term; it would diversify our asset base and put unused credit to work.
We took out the loan and were immediately greeted with a $3000 fee that had not been mentioned during the sales pitch. That was in 2001. Since then the sharemarket has risen more than 40 per cent but our investment, which, in line with the market, should now be worth about $140,000, is instead worth half that - $70,000.
Westpac has destroyed value and repeatedly avoided providing any explanation of how it invested the money. The loan generates payments to us from the bank but these merely offset the cost of capital. Where is the capital gain, the point of the exercise?
Everyone has a bad banking story, and we take for granted all the productive things the banks do for us. It is the bad stories that come to mind when the big four banks issue their profit statements. In the latest financial year the big four made a combined profit of $24 billion.
So strong is their profitability that all of the big four Aussie banks are ranked in the top 25 of the world's largest banks measured by market value. Such is our market concentration, Australia has four banks in this top 25, the same as the US, while Britain has two, Japan one, France one and Germany none. It's because Australia's big four have a combined return on equity - profit - more than twice the global average for banks.
Still, I much prefer the status quo to the alternatives in the US and Europe, where solidity has given way to stress.
It is easy to see why our banks did not want to pass on last week's interest rate cut by the Reserve Bank. A financial storm is blowing as the cost of raising short-term funds on the global market is surging as Europe runs short of cash.
The European Union is caught in a liquidity trap of its own making. The headlines coming out of London at the weekend, after yet another crisis summit by the leaders of the EU, do not make for comfortable reading.
The Telegraph: ''Euro zone banking system on the edge of collapse.'' The paper's lead financial story began: ''Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.''
The Daily Mail led with this splash: ''Yes, Cameron got it right: Most voters agree with Prime Minister vetoing treaty changes . . . and half think we should quit the EU.''
On Saturday morning, local time, a schism opened up between Britain and Germany-France over how to respond to the EU sovereign debt crisis. This is on top of the schism between Germany-France and southern Europe over debt and productivity. The crisis could open another schism, within the British government, as the Conservatives and the Social Democrats brawl over Britain's role within the EU.
In the past year, the crisis has brought down the governments of Italy, Spain, Greece, Ireland and Portugal. Nothing the EU leaders said at the weekend alleviated the more immediate threat of the liquidity crisis facing the euro zone's banking system.
As if to underline this, on Friday, even before the summit was over, the debt rating agency Moody's downgraded the debt of three giant French banks, Societe Generale, Credit Agricole and even BNP Paribas, the biggest French bank, which had hitherto been immune to downgrades. France was meant to be impregnable to contagion.
Suddenly, Australia's banks don't look so greedy after all. They look steady. They look like ports in a storm.
For this we can thank good government policy and good banking. Prudential standards set in place by past governments staved off the market in junk mortgage debt that fused the US banking system in 2007-08. Strong fiscal policy left Australia with no sovereign debt overhang and a budget surplus when the financial crisis hit in 2007. Australia had not taken the road of excessive debt and deficit.
Thus the reflexive calls for our banks to pass on the Reserve Bank's interest rate cuts, in full, are now double-edged. Every move to relieve borrowers with lower interest costs is offset by the cost to the legion of savers, including superannuation funds, who rely on interest-bearing deposits for income.
With a growing squeeze in the offshore market for cash, our banks will need to raise more capital onshore. In this context, a healthy bank is far preferable than a stressed bank. They may need their fat for harder times.
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