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The Forum > Article Comments > The oxymoron that is banking competition > Comments

The oxymoron that is banking competition : Comments

By Evan Jones, published 20/11/2009

Australia's big four banks are at the core of the entire economy - courtesy of the regulatory and political establishment.

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It seems unclear whether the author is criticising competition, or the lack of it; regulation, or the lack of it.

The author seems to assume that the regulators should be policing, and should be policing 'conscionability'. But he doesn't say what that is. Equity already provides remedies for unconscionable conduct, but that is clearly not what the author is referring to. He means unconscionable in an undefined regulatory sense, applying to purchases by banks of other banking businesses. But how is a bank, or anyone, to know whether a purchase is okay, or is 'plunder'? The author doesn't say; and clearly it can be nothing but arbitrary opinion in any case.

While the subject is the desirability of more bank competition, how much competition does the ACCC have? How much competition does the Commonwealth have? Europe's Competition Commission was a monopolly, non? Does anyone voluntarily pay for the service of these monopolists? No. What credibility do they have as regulators of competition?

"Meanwhile, bank incautiousness during the boom has been complemented by bank bastardry during the crisis. They have scrambled to appropriate security over assets of failed companies whose flawed business models they had previously underwritten (Babcock & Brown, Opes Prime)."

No-one has a crystal ball. The prospect of profit and risk of loss is on, and should be on, the entrepreneur, not the bank. It is 'incautious' to continue lend to anyone who may not be able to repay the loan.

Why do you think banks get security? It is entirely appropriate for lenders to use it to cover themselves. You seem to misunderstand the function of banking. Give away your own money.

"They have forced companies to close plants (Pacific Brands) at short notice, and to divest assets at under value (OZMinerals, PaperlinX), to clean up their own fractured balance sheets."

What causes failing companies to close at short notice is their losses, which are caused by the fact that they are making stuff that consumers don't want to buy.

You have not given any reason why banks should not resile from loss-making activities.
Posted by Peter Hume, Friday, 20 November 2009 1:14:13 PM
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"Lenders of money have been held in odium, at all times and among all peoples" Mises. Although the author is an academic in political economy, he offers no exception to the general prejudice of the ignorant, it seems.

Certainly none of what you say is any recommendation of more, rather than less regulation of banking.

What is causing the four banks to be the cozy anti-competitive cartel that they are is government licensing - derrr. There is no reason to abandon the principle of free entreprise in banking. The only necessity is for the general law against fraud to be applied in banking transactions as it is in other businesses.

The government having arrogated to itself the privilege of deciding who can enter the business of banking, then declares it necessary to police mergers and acquisitions to ensure 'competition'. The government having arrogated to itself the power to control the money supply and lower interest rates below the market rate, then declares it necessary to police banks for 'incautious lending' and 'predatory practices'. Government having co-opted the banks into its fractional reserve Ponzi scheme, then declares that it needs to police reserves and compulsorily insure deposits!

Apart from the enforcement of laws of contract, property, equity and fraud, government should no more be in the business of banking, than of pizzas or shoes. Government intervention in banking is a fraud on the people.
Posted by Peter Hume, Friday, 20 November 2009 1:24:02 PM
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Damned usurers the lot of them. How come you godbotherers dont object? Didnt your god say usury was wrong?
Posted by mikk, Friday, 20 November 2009 1:44:53 PM
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Peter Hume,

My observation of Banks from the inside before leaving for academia is, "all the animal's equal but some animals are more equal than others". In the 1990s, in Head Office, I had close contact with senior managers within Commercial Banking who were very concerned with Board validated lending to Western Australian entrepreneurs contravening the conservative guidelinesof Credit Policy and Risk Assessment. Also, while they didn't go under, international major institutional buyers of Australian farm produce essentially ignored their multimillion dollar established limits, based on the huge size of the organisations, rather than the value of security held.

Disclosure is another issue. I once had the task of reconciling aspects of one Bank's General Ledger with its Credi's Division's unproductive loans portfolio. What I found was that the Bank in several instance was not declaring the principal and interest of bad loans, rather splitting the principal to an ordinary account (account type 101) and ninety day overdue interest to account type 104 (unproductive). At the time (c. 1992), the Bank was reporting four billion dollars at risk, the true figure was six billion dollars. Without an audit, no one would pick this up, as statutory reporting was automated and the programme searched for account type 104 (and 102 & 103), not account type 101, for loans at highest risk.

It is also true that instructions, in a pre-merge Bank Rule Book,required local branch managers to refer iffy loan applications up the chain of command, for some classifications of customer, e.g., politicians and judges. That is, a line banch manager couldn't turn a loan application the G-G or the PM if the application looked poor
Posted by Oliver, Friday, 20 November 2009 1:59:10 PM
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Thank you Oliver for your inside dope on crucial aspects of banking culture that never make it into the public domain.

Re the PH comments. Life is too short to get involved in an exchange with an Austrian School devoteel, whose indubitable truths are rooted in the soundest of a priori principles. One can sympathise with the Austrians' disgust with the rents appropriated by banks licensed by the state, but let us hone in on the here and now.

PH appears to have an other-worldly picture of the bank-customer relationship.
1. Unconscionability? s.51 (especially s.51AC, business to business unconscionability) and s.52 (misleading representation) of the Trade Practices Act. The ASIC Amendment ACt 2001 moved unconscionability re financial products to ASIC, and s.12 of the ASIC Act effectively replicates the comparable sections of the Trade Practices Act. ASIC refuses to acknowledge its responsibilities under s.12 of its Act, and tells complainants to buggar off (as did the ACCC when it had responsibility before March 2002).
2. A contract is a contract is a contract. Not quite. some contracts are innately unconscionable. The most fundamental facility in banking, the overdraft, is in many cases innately unconscionable (NAB: 'the Bank may cancel the facility at any time whether or not you are in breach of this agreement'!). Moreover, banks will break a contract at will, a phenomenon rooted in the unequal bargaining power between lender and small business or retail borrower. More fundamentally, there is typically an open-ended character to lender-borrower relationships, for which the term 'incomplete contract' provides insight into the relationship's character. The term was devised by legal academics to describe the franchisor-franchisee relationship, but it is applicable to most small business relationships with corporates on the other side of the 'market'. Of course the greatest manifestation of the incomplete contract is in the employer-employee relationship, which is precisely why a separate legal apparatus has arisen (and separate tribunals) in that domain. Powerless bank retail customers have an elaborate system of regulation to offset the unequal relationship. Small business, alas, does not. Hence the impasse. To be continued.
Posted by evan jones, Friday, 20 November 2009 4:05:03 PM
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Continued from previous.

3. Security. of course banks take security over borrower assets. Indeed, re small business, banks will perennially take security (especially over the family home) because doing the hard yards into borrower proposal prospects is just too much hard work, requiring real skills, skills which banks have jettisoned in the age of deregulation. But the instances that I describe in my piece above refer to lending for which the banks took inadequate or no security (perennial when lending to larger customers because they want the business, or are too lazy to do the paper work). The banks then steal security when the business is going belly-up, ripping off other creditor priorities over assets. And this just after the Bell Resources decision damning precisely this practice was handed down after 20 years deliberation.
4. equity and fraud? both furphies. The Equity courts are not available to bank victims, period. The legal profession treats equity like a bad smell. Fraud is a criminal offfense, and the police won't touch bank criminality. back to civil jurisdiction, as in point 1 above. in short, banks are above the law (save for the marginal issue of disability unconscionability, following Amadio.)

And so on, ad infinitum. But this whole unsavoury area of bank malpractice and legal and judicial complicity requires another article or three.
Posted by evan jones, Friday, 20 November 2009 4:34:38 PM
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