This week saw the launch of the Royal Commission into the banking industry. Possibly the most reluctant Royal Commission in Australian history.
Prime Minister Malcolm Turnbull long denied the need for any inquiry into Australia’s banking industry. Despite a series of scandals, including Commonwealth Bank of Australia [ASX:CBA] failing to report over 50,000 smart ATM transactions of $10,000 or higher to AUSTRAC.
An oversight that quickly led to criminals abusing the system to launder and move their money. And may have allowed terrorist groups to do the same.
Nonetheless, Turnbull stuck to his guns. Public calls for a royal commission grew. Even members of his own government joined the chorus. Still he argued that an inquiry was not only unnecessary, it would also shake faith in the industry, with potentially dangerous consequences for our entire economy.
Not without reason. Anything that affects the banks is likely to affect the entire Australian share market. The Commonwealth Bank is Australia’s largest company by market capitalisation. Combined, the banks make up a third of our share market.
A loss of confidence could be catastrophic.
But even without a royal commission, there was enough mud being slung for some of it to stick.
In December last year, Australia and New Zealand Banking Group [ASX:ANZ], Commonwealth Bank, National Australia Bank Ltd. [ASX:NAB], and Westpac Banking Corp [ASX:WBC] together wrote to Treasurer Scott Morrison. They asked that the government launch a Royal Commission into the banking industry — just as so many had called for — in order to restore confidence.
You could take them at their word, that they welcomed in investigation because they had nothing to hide. Or they may have finally had enough time to get their houses in order.
Perhaps the banks simply decided that a Royal Commission was becoming inevitable. The public seemed set on it. And so it was better to be on the receiving end of one from a sympathetic Coalition government, during a bull market, than at any other time.
Unfortunately, the bull market hasn’t cooperated.
The early weeks of 2018 have seen a sharp rise in volatility. The Aussie market has followed the US into steep falls twice. The market stability that may have factored into the big four banks’ thinking when they asked for this has since disappeared.
And if the banks were hoping the Royal Commission would step softly, they got off to an inauspicious start this week. There was a positive circus of media on hand when former High Court Justice Kenneth Hayne, now Royal Commissioner, opened proceedings. From all reports, it seems he wasn’t impressed when the banks failed to provide all of the expected disclosure of their own sins on time.
Dragging their feet could do them more harm than good in the public eye.
The sympathetic nature of our Federal government may help to save them. The Royal Commission has been given an extremely wide scope. It’s to encompass all financial wrongdoing, not just within the banking industry, but all financial services, insurance and superannuation. And do so to the incredibly tight deadline of 1 February next year.
The Commission will have to cover the sheer number of class action plaintiffs suing financial institutions in recent years. And accusations of predatory lending. It’s a monumental task.
That wide focus and short timeframe mean that Justice Hayne will struggle to scratch the surface. But 12 months may seem like an eternity to shareholders in the banking industry. Every negative headline splashed across a mainstream newspaper will mean more unwanted scrutiny. More threats to confidence in the industry.
Especially if fresh volatility in the US leads to more falls on the ASX.
Vern Gowdie, editor at our sister publication Markets & Money with more than 30 years of experience as a financial adviser and analyst, has argued for years that something isn’t right in the financial industry. He believes that share markets, bloated by debt, are due for a monumental crash. Not least the Australian banking sector.
To read about Vern’s strategy for insulating yourself from such a massive downturn, click here.
This week in Money Morning
After last week’s extreme volatility, the question on everyone’s lips was exactly how far markets could fall. In Monday’s Money Morning Harje looked to history to find out exactly that. There’s an old market saying that history never repeats, but it does rhyme. Click here to find out how far a correction could take us if that proves true.
Then on Tuesday Harje looked at a trend that’s been growing for years in the mainstream investing world. The reason for its success is obvious. Up until recently, it worked. In fact, it brought investors superior returns, with the promise of lower risks. But that promise may have been a mirage. As the recent market falls have shown, this method can sometimes be more risky than traditional stock picking. Read why here.
Wednesday’s article looked at a leading technology investor, and some of his incredible returns. The kind that any speculative investor would dream of. But recently, this famous tech investor has gone a new way. Is he simply hedging his positions? Or is this the sign of a change in strategy? And as a retail investor, what might it mean for you? Read Wednesday’s article here to find out.
Then on Thursday Harje turned the clock back to 1994, to the savings and loans crisis. He explained why the circumstances behind that panic are growing frighteningly familiar today. And he looked at the kinds of opportunities that switched-on investors can find during times of crisis. Read the details here.
Australia has benefitted greatly from China’s economic rise. And not just when it comes to our commodity exports. Australia’s tourism industry has seen massive benefits from the growing wealth of the Chinese middle class. In Friday’s Money Morning, Harje looked at a unique aspect of China’s financial system, a way in which they’re light years ahead of Australia. This trend is already widespread there, but only beginning here. As Chinese tourism continues to grow in Australia, it’s likely to become a key driver for this technology. Read the details here.
Editor, Money Weekend