Why Banks Now Want a Royal Commission


Yesterday the CEOs of the big four Australian banks sent an email to Treasurer Scott Morrison.

Despite long arguing against the need for further inquiries into their conduct, it appears they’ve now gone full circle and have almost insisted on one.

The email states:

It is now in the national interest for the political uncertainty to end.

It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong.

We now ask you and your government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence.’

In other words, bring it on!

The Prime Minister duly obliged, announcing a Royal Commission with a reporting date of 12 months.

Politically expedient, certainly. It snubs out a growing political problem for the PM, kicks the can down the road 12 months, and on the back of same sex marriage passing, allows the PM to claim progress on a number of fronts.

Or at least give him a shot at turning around the political narrative.

This was a big change in position for Malcolm Turnbull, who has constantly argued against the need for an inquiry. But his turnaround is understandable once the big banks had essentially given him their blessing.

The banks’ turnaround is less obvious.

Why on earth would they now want an inquiry?

I think it’s like this…

When red tape is good for business

So, the first answer is that they realised it was probably inevitable.

It’s a populist measure, supported both by the opposition and by a growing band of government back benchers, especially in the National party.

If something’s inevitable it’s better to get on with it than have it fester away, leaving people think that you’ve got lots to hide.

The second part of the email gives away another reason.

Here they state:

The inquiry should be led by an eminent and respected ex judicial officer; its terms of reference should be thoughtfully drafted and free of political influence; its scope should cover the community’s core concerns; report back in a timely manner; and it must replace other ongoing inquiries.

In other words, if war is inevitable, it’s better you choose the battlefield.

The reference to ‘ex-judicial officer’ is telling too.

And I think it gives away another reason for their change of heart on this matter. 

A legal representative is likely to turn to legal solutions.

This means the commission is likely to recommend increases in regulation, red tape and bureaucracy as the solution to the problems that arise. They are less likely to look at options like increasing market competition or mandating technological improvements.

And funnily enough, that’s perhaps what the big four banks actually want in the current environment.

Let me explain…

Building a moat

As the threat from fintech disruption grows, the banks are retreating to their core business.

Namely deposit taking and lending.

Their size and strength in these fields is impressive. An increase in regulation is something they have the resources to handle. Even though they might not have done so well today, they still have the financial and legal strength to get better here.

But for a cash strapped disruptor, regulations and red tape are massive barriers to entry.

A royal commission therefore allows the banks to clear the air and get a fresh slate. While at the same time make it harder for new competitors.

Wily old banks!

Sure, there might be some embarrassing revelations that come out. But as I said before, a royal commission was becoming increasingly inevitable anyway.

And let’s be honest, banks are hardly the most popular businesses in town. So what’s a little bit more bad publicity?

As long as you control the market through regulatory barriers to entry and financial dominance, you preserve your most profitable and essential position at the heart of the economy.

And once you’ve got that, no politician can take you on. Unless they want to be responsible for a banking crash.

At the end of it all maybe Australia’s big four banks will end up stronger than ever. A strange result from something they have fought so hard against.

Or maybe I’ve got this completely wrong?

Either way, it will make for compelling viewing over the next 12 months.

Good Investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia