How will the banks do in the first half results?
In this week’s video insight Stuart discusses the banks. They have dominated the media headlines for all the wrong reasons recently. Given this backdrop, first half results come at a very interesting time.
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Les Meldon
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I consider the most important future influence is going to be felt by the tax reduction program proposed in the budget.
This strangely enough is being held up by state senators that have forgotten their main purpose, namely to look after the interest of the states.
To my simple mind I see that removing millions, if not billions of dollars, from the federal goverments hands and placing them in the public domain where all the transactions they generate will produce additional GST revenue which will obviously help all state budgets.
I see the GST returns as a perpetuity paying 10% per transaction.
This appears to be a windfall to end all windfalls.
Am I missing something or should the treasurer be using the above to convince all, even self serving senators????
Les Meldon
Lindsay Byrnes
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Hi Stuart,
A very well put summary on the banks that appears to be spot on. I especially endorse your last concluding comment. You can’t legislate morality, so that a publically owned company isn’t likely to be any more or less ethical than one owned (nationalized) by a government?
The problems under the Royal Commission stem mainly from poor planning advice and the divestment of those arms of the banks now seems likely and desirable. Banks should never have got involved in that industry in the first place? It also appears that ASIC was mostl limited to a box ticking exercise where they overly relied on assurances rather than getting one’s hands dirty and doing proper audits/checks. That in turn might be sheeted home to governments (here and abroad) not providing sufficient resources and overburdening intuitions with more and more regulations. What we need is less regulation and more hands on compliance.
John
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Lindsay, can you explain what you mean by ‘you can’t legislate morality’?
Our current laws clearly derive from prior morality, in turn the enforcement of these laws is clearly influenced by moral politics. Finally our ongoing moral values are influenced by the application of laws and sanctions.
Lindsay Byrnes
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You are not going to change a persons moral code( or lack thereof ) by legislature, but rather all the the law can do is provides penalties for breaches under the act. The more complicated you make this code, with more and more reporting requirements , the greater the danger it will imping on honestly provided services to ordinary folk all intent on acting with integrity. A knowledge of what’s right and wrong doesn’t stop a an individual from acting unethically. Penalties are not enough because those inclined to do the wrong thing quite often think they are smart enough never to be caught. What you need is a more hands on approach by regulators. By all means increase penalties but don’t think that will ever be enough or that the law in itself makes us moral citizens.
John
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I have no expertise in this area but I would have thought the banks are vulnerable to significant litigation. If a real crunch occurs and households can’t make repayments the courts might be sympathetic to households who were issued fraudulent loans. This is especially possible if households hold the moral high ground. The courts might order the banks to renegotiate the deal. If the banks protest the courts may well threaten the banks to repay these households all their payments back as the initial deal was not fit for purpose and the bank can keep the house.
Maybe I am over estimating this but it seems like a pragmatic way of dealing with it to me?
Stuart Jackson
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You could be right, but if there is a credit crunch, the banks are in trouble anyway. Litigation of the kind you’re talking about wouldn’t be funded by shareholders, are the collapse in asset prices from a serious credit crunch would blow through most of that. The liability of any litigation is likely to fall back on the taxpayer in order to protect the integrity of the financial system.
John
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Maybe Stuart, but the precedent I think you are referring to – the GFC bail out – may not play out the same way. There are two important differences that I can think of
1) in most US states owners could walk away from the house, in Aus this is not possible – this ups the stakes greatly and household are much more likely to pursue legal options out of necessity.
2) In Aus deposits are already guaranteed up to $250 by the government. I would guess that if the government spend billions paying they are not going to be keen to help shareholders and the public would be outraged. Bankers might also need to careful, if they obstruct government demands the courts might be directed towards them.
What I do agree with you on is that this is a problem that compounds. When house prices are rising everyone is happy, but when people are losing jobs, they can’t meet repayments and house prices a falling households will not be happy. I have not seen any figures on what the liabilities might be in a crash scenario but I would imagine that it would be big given – the amount of fraud and the potential losses involved. I am guessing that people are modelling this already.
Stuart Jackson
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Mass litigation that is successful in the manner you are describing would wipe out the equity holders quickly, the banks would then need to be nationalised (as we saw in the UK) to prevent the financial system collapsing. That is the means by which the tax payer bails out the banks. Taxpayer would be required to bail out the system rather than the equity holders. Let’s hope it doesn’t come to that.
John
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I agree with the ‘lets hope’ sentiment but as I think you too realise there are significant factors at work here that policy and smoke and mirrors may not be able to contain. Once markets that have been poked and prodded too often get out of the cage they are likely to run wild for some time.
John
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Stuart I am not sure if I missed this but did you mention, or not, the substantial litigation that the banks face for engaging in alleged fraud?
Stuart Jackson
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I didn’t mention it. Penalties will occur but in the context of the market capitalisation and total amount of shareholder capital invested in the economy by the companies, they are likely to be relatively immaterial. The bigger implication for share prices is from regulatory change that alters either or both of the sustainable returns the banks can generate, or their growth rates/ability to compete with smaller less regulated lenders, or the catastrophe scenario that a knee jerk regulatory reaction to causes a credit crunch that brings down the whole economy.