Academic journal article Journal of Australian Political Economy

The Crisis and the Australian Financial Sector

Academic journal article Journal of Australian Political Economy

The Crisis and the Australian Financial Sector

Article excerpt

Much material has been published on the 'global financial crisis', especially on its US roots. In Australia, there is a peculiar tension in the commentary that remains unarticulated. There co-exists a general complacency or optimism, especially in official circles, with documentation of a string of financially linked failures. The latter have been mostly treated in isolation (and mostly by journalists). (1)

This article summarises a representative range of business failures. The boom years facilitated widespread bravado, incompetence and unconscionability in Australian businesses that the finance sector has fostered and nurtured. A new class of unsophisticated investors has become victim of the rosy promises of 'shareholder capitalism'. One perverse byproduct has been the further consolidation in the Australian banking sector itself. The financial regulatory agencies are found to be inadequate. Recent mooted regulatory changes reflect the need felt for action by the Rudd Government, but the changes are piecemeal and have been contested by the relevant vested interests. The article concludes with the view that no deep inroads will be made into dysfunctional elements in Australian business culture, that the Australian financial sector will continue to abuse the public interest in the service of private profit, and that the structure and culture of the financial regulatory agencies will continue to be inadequate.

Broad Dimensions of the Crisis

At the macroeconomic level, the finance sector in Australia has been less badly hit than has been the case in the US or the UK (or Iceland). There have been no Lehmann Brothers / Bear Stearns / Merrill Lynch, and no Northern Rock / Royal Bank of Scotland / Halifax Bank of Scotland (HBOS). There have been claims that the lesser financial fallout is a product of a superior regulatory framework, and of greater self-discipline by the lending institutions.

Both these claims have merit but are over-stated. The disastrous practices and poisonous portfolios of Wall Street investment banks are a reflection of the centrality of investment banks on Wall Street. (2) The more subdued adverse experience in the Australian finance sector is partly due to its predominant domestic orientation, and the concentration of power at the top. Simply, there was too much easy revenue to be made on the home turf (c/f Verrender, 2009c).

The overseas failure that bears the closest resemblance to Australian conditions is that of HBOS. HBOS expanded rapidly its business loan book with inattention to quality, especially in the graveyard that is property development. As a consequence, HBOS accumulated 19[pounds sterling] billion of bad debt charges in 2008-09, 8% of its relevant business loan book (Peston, 2009).

Australian banks did not succumb to that degree of excess, but they are guilty of similar practices, and locally unique ones as well (margin lending in particular). For example, the NAB had a significant portfolio of US-sourced collateralised debt obligations, and wrote down the bulk (over $1 billion) of their book value for 2007-08.

Analyst estimates of total loan losses by the big four banks for calendar 2009 range from $12 billion (KPMG) to $16 billion (UBS), with UBS expecting comparable pro rata losses through the first half of 2010. Australian Prudential Regulatory Authority figures highlight that, at end of June quarter 2009, bank 'impaired assets' stood at $28.3 billion, 1.08% of total assets. (3) Two years previously, the comparable figures were $4.0 billion, 0.20% of total assets. (4) At June 2009, the banks had made provision for bad and doubtful debts of $20.4 billion, up from $7.8 billion two years previously.

Large corporate exposures were the major culprit. The big four banks all had exposures to ABC Learning and Allco Finance Group. The CBA and NAB had additional exposure to Babcock and Brown, and the CBA (the predominant 'loose lender') had exposure to Lehman Brothers. …

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