It is true that Australia’s banks came through the GFC relatively unscathed. Principally, this was as a result of the regulatory system and political policies that Australia has in place. But our banks and finance industry should not be allowed to simply push aside the GFC as a bad memory and return to practices that brought the GFC about. We need to draw lessons from the GFC and strengthen our finance industry through stronger regulation.
Wall Street bankers couldn’t believe how easy it was to invent new products, pull the wool over the ratings agencies eyes and sell AAA rated securities (later to be found to be worthless) to investors around the world. A new language emerged, Securitisation, Mortgage Bonds, Collateralised Debt Obligations, Sub Prime, Credit Default Swaps.
The more money the Wall Street banks made, the more they poured into Main Street banks in search of more and more mortgage bonds. And Main Street banks used the money to continue to lend sub prime mortgages to anyone, regardless of whether they could afford to repay.
And of course many millions of people couldn’t afford to repay, especially when the honeymoon interest rate on their sub prime mortgage ended and jumped up 2 or 3 percent. The house of cards collapsed, leaving millions homeless, millions out of work, collapsing banking systems around the world and devastating whole economies.
Why would these presumably, intelligent people running some of the biggest banking houses in the world; Goldman Sachs, Citibank, Bank of America, UBS, Deutsche, enter into such risks?
The answer: corporate greed driven by short-term thinking and powered by massive remuneration packages that rewards risk taking and immediate returns. From the CEO loaded up on bonuses worth tens of millions if they achieved short term profit growth, to the bank employees loaded up on performance bonuses for the volume of debt they sell.
In Australia, our banking system wasn’t heavy geared into these toxic US packages, but we weren’t immune from the failures they triggered. Our banks are heavily reliant on overseas borrowing and the money stopped flowing. Stock market falls saw companies such as Storm Financial, who had persuaded people to take margin loans against their homes to invest, collapse taking with them people’s life savings and homes.
Our Government provided our banks with taxpayer guarantees on deposits and overseas borrowings to prop up the system. The Government also pump primed the economy to ward off the global economic recession.
So, two years on, what lessons have been learned and what has changed in our financial system?
Firstly, we have lost a number of players who were bought out or collapsed during the GFC. Westpac was allowed to take over St.George, CBA bought Bankwest, the major banks now own all or part of Aussie Home Loans, RAMS and Wizard. Storm, Westpoint and Opes Prime failed. Roughly 15,000 jobs were lost from banking and finance.
The concentration of the market, particularly in banking, has given rise to calls for increased competition – despite the fact that competition, by itself, will not change behaviour.
Secondly, some good work has been undertaken by governments at a global and local level. The G20 has developed some new rules for the global finance system, including stronger capital ratios for banks. But the fervour for reform is petering out.
Locally, our government has nationalised credit laws and introduced a responsible lending regime that requires that credit only be sold where it is seen to be ‘not unsuitable’ for the consumer. They are also looking at financial advice and seeking to introduce a statutory fiduciary duty ensuring advice is provided in the client’s best interest, while banning conflicted remuneration such as commissions and volume payments. A move being strongly opposed by the industry.
The government is also working towards tougher rules on executive remuneration for publicly listed companies and the regulator APRA has introduced its own remuneration rules for approved deposit taking institutions.
But if you walk into the boardrooms of our big banks and finance companies, or sit across the table from the remuneration and industrial relations managers in bargaining, you could be forgiven for thinking the GFC never happened and if it did it certainly wasn’t through any fault of finance companies.
Executive remuneration continues to spiral upwards to dizzying heights. Ralph Norris, Commonwealth Bank CEO picked up a whopping $16 million in 2009/10, up a lazy 75% with most of it paid as part of incentive (bonus) payments.
Despite legislative changes, finance employees face continued increases in sales targets for the volume of products and debt they have to sell. These targets are directly linked to remuneration outcomes including both bonuses, commissions and base salary increases. Not meeting targets means your job is under threat.
Banks and insurance companies continue to negotiate for the removal of proper living wage outcomes for employees, seeking to move to performance (read sales target) based pay.
Personal debt levels amongst Australians have never been higher. Added together, personal debt exceeds the Gross Domestic Product of the whole country.
Yet rather than try and curb our bank and finance company behaviour by extending the ban on volume and sale target based remuneration across the industry, our government is looking to allowing our banks to create their own bonds to raise even more money to lend to even more people who don’t need bigger debts. Sound familiar?
Post the GFC, we cannot allow our banks and finance companies to return to the same behaviours that brought the GFC about in the first place. We must keep the passion for reform, through strong regulation, that provides greater stability, fairness of access and imposes community obligations on our banking and finance sector.
Rod Masson
FSU National Policy & Communications Director
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