Wayne Swan’s banking reform (or lack of)

PORTFOLIO POINT: The reform package had been intended to crack down on the major banks has in fact helped them.

I think we can confidently report that the package of measures announced yesterday by Treasurer Wayne Swan to “crack down” on the major banks and make them more competitive will have the opposite effect.

Most of the informed reaction this morning has been along the lines that the reforms won’t do much good, but they won’t hurt either. Having read the statements and the draft legislation carefully, I’d go further: not only will the reforms not hurt the big banks, they will make life easier and less competitive for them.

So the question arises: Is this deliberate?

Has the government cooked up a secret plan to reinforce the power of the big banks to buttress the financial system, while coating it in the spin of an attack on them? Or is it simply that they don’t know what they are doing?

I can exclusively reveal today that it is, in fact, the latter. Thanks to another sensational cable from WikiLeaks, Eureka Report has obtained a transcript of the key meeting to plan the package called ‘A Competitive and Sustainable Banking System’ that took place in Wayne Swan’s office.

Here it is:

Treasurer: “Right. Exit fees. Out they go!”

Bureaucrat: “Er, Treasurer, ANZ and NAB have already dropped exit fees. If you ban them, it will make the small banks and non-bank lenders less competitive because they will be less able to attract funding and be forced to charge upfront fees. They’ve been warning us not to ban them.”

Treasurer: “I don’t care. The focus groups are clear on this: the people don’t like exit fees. They prevent shopping around and cost buckets. Get rid of them! I tell you what … to make it up to the credit unions and building societies how about we let them call themselves ‘nearly banks’ or something and let them do a nice marketing campaign? OK, that’s a tick. Now … covered bonds. I want them.”

Bureaucrat: “Yes Minister, excellent, visionary plan, but while they sound like a good idea, actually they will only help big banks raise more funds at the expense of small banks. APRA explained this in a letter to all the banks and non-banks in 2008, when it knocked them back.”

Treasurer: “I don’t care about that! What would those noggins at APRA know? Did they do any focus groups? In fact have they done any polling on this at all?”

Bureaucrat: “I don’t think they have, Treasurer.”

Treasurer: “Right, well there you are then. Another tick. Now what about my tough new laws against collusive price signalling? That’ll stop those buggers from nodding and winking at each other!”

Bureaucrat: “Er, well actually, Treasurer, the Productivity Commission chairman Gary Banks warned you not to do this because of the unintended consequence of stopping banks from keeping the market informed.”

Treasurer: “Look, that was the No.1 point on that appalling Joe Hockey’s nine-point plan, and he got far too much good media from that. It’s not fair! I’ve been working on collusive price signalling for ages and ages, and he gets all the credit. I won’t have it.”

Bureaucrat: “Well OK, Treasurer, but we’ll have to put into the amendment that it doesn’t override existing laws about keeping the market informed.”

Treasurer: “Whatever.”

And so it was.

The key provision in the draft legislation released yesterday – it’s a new Section 44ZZW of the Competition and Consumer Act 2010 – says that a “Corporation must not make a disclosure of information if … the corporation makes the disclosure for the purpose of substantially lessening competition in a market.”

That’s pretty clear.

The next clause says that clause does not apply if “the disclosure is authorised by or under a law of the Commonwealth, a State or a Territory”.

This means that the law requiring “continuous disclosure” of all market sensitive information, which of course includes any interest rate intentions, overrides Section 44ZZW.

So, would there ever be a press release from a bank on which the ACCC could base a prosecution under Section 44ZZW because the commission could prove it was made for the purpose of substantially lessening competition, and was not covered by any other existing disclosure law?

Never.

Bottom line: to the extent that yesterday’s ‘Competitive and Sustainable Banking System’ package makes any difference to the banks in your portfolio, it will improve their returns.

Banning exit fees and allowing covered bonds will favour the big banks; the action against collusive price signalling is meaningless. The other provisions are not even meant to be more than spin. I still think you should lighten your holdings of banks because their returns will decline in the years ahead, but the weekend package will mean they won’t fall quite as much.

And if you think I’m being too cynical, look at this morning’s sharemarket. All the major bank shares went up in the first 90 minutes while Bendigo & Adelaide Bank and Bank of Queensland were both hammered. It got worse as the day went on.

By the end of the session Bendigo & Adelaide fell 34¢ to $9.91 or 3.1%, and Bank of Queensland fell 40¢ to $10.92, or 3.5%. CommBank went up 1.2%, NAB went up 1.4%, Westpac 1.5% and ANZ 1.1%.

The market has spoken.

Just for interest.

D