Don't you just love the banks? They just give and give and give. In fact, they are so generous that, according to a recent survey by The Australia Institute, more than half of Australians who do not have a job received unsolicited offers of credit cards last year. Offering money to people in their time of need, how good is that?
Today's announcement by the National Australia Bank that it made a cash profit for the June quarter of $1.1 billion, up from $0.9 billion in the same quarter of 2009, shows that the big banks were able to exploit the global financial crisis to increase their profits, according to The Australia Institute. "A 22 per cent profit increase in a difficult economic climate shows how powerful the banks are due to a lack of competition," said Senior Research Fellow David Richardson.
Australian banks are aggressively encouraging customers to take on more debt regardless of their ability to pay it back, a new survey by The Australia Institute has found. The survey results, published in Money and Power: The case for better regulation in banking, reveal the extraordinary extent to which Australian banks promote consumer debt through unsolicited offers for new credit cards, personal loans or increased credit-card limits.
The power of Australia's big four banks is unmistakeable. Their underlying profits equate to almost three per cent of GDP, up from less than one per cent a quarter of a century ago. Of every $100 spent in Australia, nearly $3 ends up as underlying profit for the banks. Profits are so high because the banking market is highly concentrated. The big four banks now control more than 75 per cent of all bank assets and banks account for over 90 per cent of all lending by financial institutions in Australia.
The big banks now dominate the Australian financial system in the same way that the Melbourne Storm dominated the rugby league. They take the profits they made last year and they use them to fend off new competitors next year. They take the profits they earn in one part of their business and cross subsidise the prices they charge in the parts of the market where they are actually facing competition. Just as it isn't 'good for the game' to see the same clubs always winning, it's not good for customers or the economy to see a small number of banks rake in record profits year after year. It's time our governments and regulators put some lead in the saddlebags of the big four banks.
Banking is an essential part of the Australian economy - almost an essential service. So why should it be "extremely profitable" to use the former RBA's Governor's words? Why do bankers have to be exceedingly privileged? What does that mean to those of us who need to use the banking system? And what can we do about it? The Australia Institute has just published a paper, A licence to print money: bank profits in Australia, that tries to answer some of those questions. It confirms the Governor's words that the banks are indeed extremely profitable, especially the big four; the ANZ, Commonwealth, National and Westpac.
Australia has some of the most efficient banks in the world. That's a view often expressed as a reason for the country avoiding the worst of the financial crisis. The banks didn't resort to giving risky loans because of safe, rational business practices. There's another view, proffered by David Richardson, a research fellow at the Australia Institute, that the major banks in Australia would have behaved with the same excesses as some of their overseas counterparts if it wasn't for the regulatory regime imposed on the industry.
Banks were portrayed as the villains of the global financial crisis; many of the big international banks and their executives were associated with greed and excessive risk-taking. Regulators were obliged to step in with unprecedented rescue packages to save the financial systems in the US, the UK and, to a lesser extent, the major European countries. Australia was also affected but fortunately, the Australian banking system survived relatively unscathed. There is now a view that Australians were protected from the crisis because of the financial strength and profitability of the banks and that profitable banks provide a range of other benefits to the Australian community.
The behaviour of Australia's biggest banks isn't getting better. Instead the Australia Institute claims banks have emerged from the financial crisis with more market share and the opportunity to make too much profit.
The global financial crisis has meant Australia's top four banks have moved into the world's top 10 banks in terms of financial soundness. While that says a lot about Australia's regulators and regulatory environment, the global financial crisis has also meant much of their competition has been wiped out as customers consolidate around 'sound and solid' institutions.