The solution? Bring back the public bank.
In an article published in the Australian Economic Review, University of Melbourne economists Paul Kofman and Carsten Murawski have called for an overhaul of Australia’s banking system and the reintroduction of a public-sector banking institution.
They argue it would significantly reduce risk for individual customers, provide core banking services at cost to the more vulnerable sectors of society, and better place Australia to develop into a global centre for asset management.
The state-run bank, which would provide core financial services to individuals and small businesses such as savings accounts, payment services, mortgages and basic credit, would mirror comparable institutions in European countries such as Germany, the Netherlands and Switzerland.
“A major advantage of such an institution would be its focus on core banking activities, in isolation from non-core, higher risk activities,” the pair wrote.
“Another crucial advantage would be the alignment of the interests of the providers of capital (mainly the government and depositors) with the mission of the institution, the cost-effective provision of core banking services to the public.”
A key benefit would be a better deal for deposit holders, who have despaired as successive interest rate cuts have slashed their returns. “It would mean you would get better deposit rates than are currently available, which is a largely overlooked side of the market [from the banks’ point of view],” Professor Kofman said.
This debate is not new. In 1999, US President Bill Clinton controversially repealed the Glass-Steagall Act, which kept low-risk, retail and commercial banking separate from high-risk investment banking.
“Where a bank is set up to provide certain core services to the public, which are not high margin, this would be a bank which would not suffer from the problem that our big four have which is to maximise shareholder return,” Professor Kofman said.
The proposed institution would be independent but backed by the Commonwealth and funded by government equity, deposits and public debt, and would be governed by an independent board.
Even if depositors pulled their money out of the big four, the effect would be minimal, he argues. “I suspect they would be more aggressive in other areas, and obviously that means the capital requirements would have to be higher, but it would be a proper reallocation of the risk pricing,” he said.
The other big benefit, according to the authors, would be the potential to break up the dominance of the big banks which is stifling innovation and competition and limiting access of new firms.
With one of the world’s most advanced retirement savings systems and largest pools of assets under management, Australia is well placed to develop into a global centre for asset management, particularly retirement savings.
“Today’s banking system seems ill-equipped to achieve this global position. The big four struggle with too many competing goals and lack incentives to innovate,” they write.
“That translates into a lack of attractive jobs, stimulating many of Australia’s brightest graduates to migrate to the major financial centres like New York, San Francisco, London, Hong Kong and Singapore.
“Solely relying on ‘the market’ to unlock this potential will fail, as it has in the past. What is required is political and commercial vision and the courage to make substantial changes to the banking system. In a fast-changing and highly competitive world, a commitment to conserve the status quo will only lead to slow, withering decay.”