Australia’s big four domestic banks are pursuing a relentless strategy of maximising profits, helped by a booming housing market and protected by the blanket government guarantee on deposits that was implemented following the global financial crisis.
Commonwealth Bank of Australia (CBA), for example, posted a record-breaking A$9.9 billion ($7.8 billion) full-year profit in August.
Shareholders are dining well on fat dividends. Together, the four largest commercial banks – ANZ, CBA, National Australia Bank (NAB) and Westpac, which make up 33% of the benchmark ASX50 index – pay an average yield of 6%. And some of the main beneficiaries are Australian workers through their compulsory superannuation accounts.
But the moral tension created by the fact that bank shareholders are also bank customers often allows the big four to behave badly with impunity. In the same month CBA announced its mega-profit it also faced allegations of money laundering, with up to A$70 million in large cash deposits from criminal gangs washing through its cashpoint machines and possible terrorism financing activities going unreported in the required time.
Reserve Bank governor Philip Lowe responded by saying service at the banks is taking “a back seat to sales” and “the desire for short-term profit means not enough attention is being paid to risk management".
It was an uncharacteristically strong reaction from a central bank which over the years has stood by while the banks have been taken to court over charging excessive fees, offering dodgy financial advice to retirees, and placing punitive conditions on holders of small-to-medium business loans.
If past scandals are anything to go by, however, the heat around CBA will soon die down. The bank’s board has moved to bring forward its succession plan for chief executive Ian Narev, saying he will be replaced by the end of this financial year – that is, by next June – but there has been no genuine apology and no commitment to do things differently.
The only real way for Australia to see through the conflicts of interest and finally hold the banks accountable will be to conduct an independent enquiry into their activities, including the amount they donate to politicians. The opposition Labor Party has been calling for a Royal Commission into the sector since mid-2016 and the latest scandal adds weight to this appeal.
A Royal Commission will require tenacity. Credit expansion currently fuels the economy and clipping the wings of the banks could lead to a drop in housing and construction activity. It could also lead to lower dividend payments.
On the other side of the ledger, it may cool excessive lending to real estate and head off another financial crisis. And it will send a clear message to four of Australia’s largest corporate citizens that exploiting customers’ vulnerabilities for the sake of fast profits is distasteful and culturally corrupt.