10 comments on “Frances Moves On!

  1. Great article by Frances and I think she is absolutely right, the key issue for stable banking is resolvability. And small banks can be resolved more easily than large banks unless there is a systemic and collective failure.

    The only point that I would make is that comparisons with New Zealand are not all that relevant. It is true that is has no deposit insurance and has never had a bank run. However there are very few domestic banks, in the sense of NZ owned and operated running exclusively in NZ. about 90% of the banking industry is made up of branches and subsidiaries of Australian banks (ANZ, Westpac, Commbank, NAB etc). So the NZ regulator is a host and not a home regulator.

    Effectively this means that NZ doesn’t have to worry too much about bank failures because that is really a problem for APRA and the Reserve Bank of Australia. Australia is introducing a deposit guarantee scheme and the Australian government expressly guaranteed deposits in all their banks during the financial crisis.

    So the NZ experience is simply not transferable to an economy like the UK or the US.

    Apart from that criticism I agree with pretty much everything in the article.

    unfortunately politicians are looking for a magic bullet to prevent another banking crisis because they don’t want to recognise the reality that it was about bad lending decisions and a property bubble created by interest rates being too low for too long. If we want to point the finger of blame lets point it as the central banks.

    Instead they are furiously trying to stoke the bubble back to life as they need the stamp duty revenue.

  2. Interesting point about stamp duty, Offshore Observer. In Australia, stamp duty is a purely state matter and banks are a purely federal matter. Do you think that makes a difference?

  3. Matthew L, I hadn’t really considered that. I was thinking about the UK. It might make a difference, but in my view the reasons why Australian banks fared much better in the GFC is a combination of (1) a tougher regulatory regime, I read somewhere but can recall now so could be wrong that RBSI has a tier one capital of 11% under FSA rules but under Australian rules it would have only been about 8% so more capital is required (2) the four pillars policy preventing the big 4 Oz banks merging effectively kept them smaller and prevented them becoming global players and serving a primarily domestic market and (3) being too far away to matter. This last point is probably the most relevant, Australia tends to overrate its importance but the simple fact of the matter is that the Australian banking industry is just not that globally relevant.

    There is also the fact that the finance sector is a pretty small part of the Australian economy compared to other sectors such as mining etc. I find it interesting that Canada also avoided much of the disaster and has a pretty similar economy to Oz.

    Back to stamp duty your point is a good one in that the incentives of State and Federal governments are not aligned. The feds want a stable banking sector so they don’t have to bail it out while the States want growing property prices and hence revenue.

  4. Thanks OO, interesting points. The federal government has actually been trying to get the states to abolish stamp duty entirely for a while. Amazing how rational government can be when it’s not blinkered by greed.

  5. @Matthew L, getting the states to abolish stamp duties would leave more sweat of the workers’ brows lying around to be pillaged by the federal government. Rational, greedy, behaviour.

  6. Offshore observer

    Actually, that’s not true – any more than the fact that the Clydesdale is owned by the National Bank of Australia means that depositors in the Clydesdale can claim on Australian deposit insurance. The Australian-owned banks in New Zealand are subsidiaries. They are regulated by the New Zealand regulator and there is no deposit insurance.

  7. Frances, A quick look at the RBNZ web site shows that ANZ, Westpac, Commonwealth, HSBC, Deutsch Bank, Rabobank etc operated in New Zealand as branches and not subsidiaries.

    Its also why NZ has made reservations under the UNCITRAL model law on cross border insolvency which excludes banks from that regime. They have a very handy tool that allows a bank that is operating as a branch to be converted to a subsidiary if necessary – although how that works in practice would be interesting.

    I am not saying that NZ depositors can call on Australian deposit insurance, just that if one of the Australian banks gets into trouble it is primarily the problem of APRA and the RBA as home regulators. the RBNZ as a host regulator will be playing second fiddle in a crisis.

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