Bankers are inherently dishonest?

In What cheek: the unwashed are breeding John Birmingham mentions research that found that bankers, when reminded that they were bankers, were more dishonest than other professions.

A report in the journal Nature has found that among the professions, bankers "distinguished themselves by their dishonesty". Crucially, they became more dishonest the more they were reminded that they were bankers. Sneaky scientists asked a bunch of suits and bizoids to report the result of a series of coin flips in return for a pay off. After being asked about their jobs, the other professions behaved as before. Honestly. The bankers, suddenly remembering they were bankers, started to cheat.

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As Jason Karaian put it, reporting for Quartz on this fascinating research, "what makes the persistent misconduct and toxic culture of modern banks so galling is that, in the words of a former head of Britain's financial regulator, so much of what they do seems 'socially useless'."

There is even evidence, suggests Karaian, that once the financial industry gets big enough, it actually restrains or even subtracts from economic growth.  "Untethered to the economy it is meant to serve, banks devise self-serving, self-referential products and services with massive risks and meager rewards."

The GFC increased public debt

Michael Pascoe in Why our financial minnows are still too big to fail takes a look at a recent speech by Reserve Bank Governor Glenn Stevens. Stevens gave a "carefully considered presentation on how economic policy makers handled and perhaps should handle the global financial crisis".

One of Steven's observations Pascoe highlighted was the increase in public debt due to the GFC:

And then there was another “it’s not about Australia” observation by the governor that nonetheless is worth remembering in the local political context:

“One of the difficulties has been that public debt burdens rose sharply. This was partly as a result of the cost of fiscal stimulus measures and bank recapitalisations in some cases, but it was mainly because of the depth of the downturn in economic activity.

"A financial crisis and deep recession can easily add 20 or 30 percentage points to the ratio of debt to GDP, and did so in a number of cases.”

If you don’t like the (relatively low) level of Australian government debt now, consider what it might be if we hadn’t “gone early and hard” with stimulus. 

And, no, it wasn’t just China that saved Australia from recession – one of the more obviously weird claims regularly made from the loonier edge of the right.

Banking scams

In The Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet Matt Taibbi looks at the move of big banks into the manipulation of commodities and markets.

Banks and cost of funding

This week ANZ and Westpac increased interest rates on variable rate loans. ANZ also reduced intereste rates on three year fixed mortgages. The banks have been telling us for some time that they have increased funding costs so the rate rise was no surprise. However, given their level of profitability, I think the interest increases are indicative of an industry lacking sufficient competition. In a competitive environment a business is limited in its ability to pass cost increases on to its customers. In many cases it will need to accept a lower level of profit instead.

Jessica Irvine addresses this issue in High returns, little competition - life is still sweet for the big banks. She argues that Australia's big four banks have an excessive return on equity (average 15%) given their low risk level.

Banking, by contrast, ain't exactly rocket science. It's a very simple process of buying low and selling high. Borrowing at a certain rate, lending at something higher and sitting back to collect the interest. The potential for innovation is low, on par with, say, a utility. Banks are a low-risk investment. Why, then, should they offer shareholders average or above rates of return? They shouldn't.

She argues that we have a failure of competition in the banking industry:

So how do the big banks get away with it? When faced with higher costs, businesses in a competitive market have only three options: cut costs, raise prices or accept lower profits. Most businesses have only a limited capacity to raise prices - because they would be undercut by a competitor. If a business can pass on higher costs entirely to customers, it is a clear sign that there is a failure of competition in the market. Which, of course, is the bottom line with the Australian banking system. Has been for a long time.

I agree with her conclusion:

Customers have every right to feel ripped off if they're slugged with higher rates. Australian banks just don't take enough risks or add enough value to justify their high rates of return.

Disclaimer: I own shares in ANZ bank.

Recommendations to improve the competitiveness of the banks

Mike Bouris and Christopher Joye have written an essay entitled Our banks: too big to fail, too few to be competitive. It's an interesting discussion on the competitive advantages the large banks have in Australia in raising funding. They also make three recommendations to improve the situation.

Edit 1st March: Crikey takes a critical look at the claims by Bouris and Joye in Wallis not Joyris, the Yellow Brick Road duo.