How the banks goaded the Government and got badly stung: Gottliebsen

In three months time bank shareholders will think that the latest Australian government moves are a row of beans because profits will not be affected. But in a year or two bank shareholders will come to understand just what a severe blow they were dealt on December 12, 2010.

Indeed long-term shareholders in each the big four Australian banks will look back at their 2010 crop of bank CEO’s and say: “You muffed the greatest opportunity our bank ever had or will ever have to secure a unique local franchise.”

Or let’s put it another way. Bad decisions by bank CEO’s and their boards have goaded the Australian Parliament (its not just Treasurer Wayne Swan) into moving to make bank brands a little like soap powder which sells on low margins

What Swan has done is clever and over time he will succeed to the detriment of big bank shareholders.

Prior to the financial crisis foreign banks and non-banks were starting to provide real competition in some areas of the banking market. The GFC saw them all disappear. This represented an unparalleled long term opportunity for the big Australian banks.

They have blown it. There is no question that their basic argument – that their interest costs are rising faster than the Reserve bank interest rate rises – was correct. But you could not sell that argument when bank profits were skyrocketing partly as a result of abnormally low bad debts.

Banks had to be patient and not force the Gillard government into taking precipitous action. But bank CEO’s are under the spell of the short term profit thinking induced by Australian institutions and snubbed their nose at all political parties.

So Wayne Swan has not only given the credit uinions, building societies and regional banks the opportunity to gather deposits offering magnificent security via government guarantee, he has made it easy for customers to shift their loans away from banks so lessening bank customer “loyalty”.

Worse still he has Bernie Fraser devising a way to make it easy to switch deposits between banks. If that happens then banking will be very portable indeed. Big banks will have to invest in their customers which will be very costly and will certainly reduce profits.

Wayne Swan has thrown a carrot to the banks. He is taking steps to have more of our superannuation money put into bank deposits to lessen Australian bank dependence on foreign borrowing. But that comes later.

A great many scribes are saying Swan has not done much. Don’t you believe it. This is fundamental change brought on by banks that did not think longer term and lost the art of communication with the market place. Accordingly they lost the chance to cement their current status.

This article first appeared on Business Spectator.