‘Break up the banks’, Australians tell the Royal Commission

The public and experts made more than 1,000 submissions to the Interim Report of the Financial Services Royal Commission by the 5:00 PM 26 October deadline. Many if not most of the submissions urged Commissioner Kenneth Hayne to recommend a structural separation of Australia’s banks.

In his interim report Commissioner Hayne cited the US Glass-Steagall Act of 1933, which until 1999 separated commercial banks with deposits from speculative investment banking, to show that the option of structural separation of the banks is not “novel”. He bookended his report with two crucial questions:

“What can be done to prevent the conduct happening again?”
“Is structural change in the industry necessary?”

The submissions reflected what many Australians are coming to realise, that structural change is necessary to prevent the conduct happening again.

Numerous distinguished banking experts emphasised the need for structural separation in their submissions:

Former ANZ director and chairman of Woolworths and the Herald and Weekly Times John Dahlsen wrote: “Structural change is needed … complexity makes change even more difficult. There is a powerful argument that simplicity alone will help performance and transparency. … I believe retail banking and related activities should be separated out from financial services and insurance, leaving non-retail bank activity, say commercial, in a separate entity. Guaranteed deposits would only be available to the retail bank.”

Digital Finance Analytics Principal Martin North, an expert in British and Australian banking, recommended: “The large players are too big to fail and too complex to manage, and need to be broken apart. A modern Glass-Steagall separation would achieve this, and is proven to reduce risk, and drive better customer outcomes and right-size our finance sector.” He elaborated: “In addition, there are significant risks from their operations in derivatives, and in an integrated environment, costs, risks and profits are cross linked. Given the size of the derivatives sector (significantly larger than before the GFC), the systemic risks are significant. To counter this, we advocate the implementation of a modern Glass-Steagall separation, where the high-risk speculative activities are separated from the normal lending, payment and deposit functions within banking. This would have the added benefit of reducing the potential risks of a bank deposit bail-in in a time of crisis.”

Dr Wilson Sy, the former Principal Researcher at the bank regulator APRA (Australian Prudential Regulation Authority), wrote: “The financial services industry should be structurally separated into traditional commercial banking and investment banking. Traditional commercial banking should protect the normal functions of the economy with simple products and activities: payments, deposits, home and business lending. Investment banking should provide services for financial innovation, venture capital formation, trading of securities and other complex products and activities. ASIC and APRA would then be regulating different sets of financial institutions for distinctly different economic purposes.”

Greens Senator Peter Whish-Wilson, himself a former banker, released the Australian Greens’ submission, which calls for “Structural separation of financial institutions—break-up the banks”. The submission elaborates: “It is simply too difficult for legislators and regulators to identify, and act to prevent, all of the opportunities that arise within integrated institutions to do something other than act in the best interests of consumers, be it by subtly but consistently directing existing customers towards in-house products, or by exploiting the loyalty and inertia of customers with excessive fees and charges. The profit motive is simply too strong and structural separation is necessary to curb its worst excesses.”

The Citizens Electoral Council’s submission stated that the only answer to Commissioner Hayne’s questions is “the full structural separation of commercial deposit-taking banks from all other financial services, including investment banking, financial advice, wealth management, stock broking, superannuation, and insurance.”

The royal commission can only do so much—tell cross-benchers to lead Parliament on banking reform

The ball is now in Commissioner Hayne’s court as to whether he recommends Glass-Steagall in his final report; be assured, however, that the banks will be lobbying him against it, and there are indications that the discredited regulators such as the RBA are also pressuring him against structural change.

Yet even if Hayne does recommend structural separation, there is no guarantee his recommendations will be implemented. Governments ignore royal commission recommendations all the time, and the fact is that both the Liberals and Labor receive big donations from the banks, which will be trying to convince them it’s not necessary. This underscores the fact that Glass-Steagall will only be achieved if the Australian people demand it of their elected representatives.

The good news is the major parties are at their weakest right now. With the election of Kerryn Phelps in the Wentworth by-election, independents and minor parties now hold the balance of power in both the House of Representatives and Senate. In the House, four of the six cross-benchers have expressed support for banking separation. In the Senate, almost all cross-benchers, including the Greens, Centre Alliance and independents, and Nationals Senator Barry O’Sullivan who crossed the floor, voted for Pauline Hanson’s 18 October Notice of Motion to break up the banks (only Justice Party Senator Derryn Hinch and Liberal Democrat Senator David Leyonhjelm voted with the major parties against it).

The cross-bench MPs should use their balance of power to insist the major parties commit to banking reform, especially a full, Glass-Steagall structural separation. Legislation is already in Parliament: the Banking System Reform (Separation of Banks) Bill 2018, introduced by Bob Katter and Andrew Wilkie into the House of Representatives on 25 June. Contact the cross-bench to ask them to insist the major parties allow a debate and vote on this bill. They need to know they have the public’s support for doing this. Only unrelenting, maximum pressure from the public will outweigh the lobbying power of the banks over Parliament.

Call or email these cross-bench MPs:

Adam Bandt, Member for Melbourne, Australian Greens. Supports separation.
Ph: (03) 9417 0759
Email: Adam.Bandt.MP@aph.gov.au

Cathy McGowan, Member for Indi, Independent. Support unknown.
Wangaratta Ph: (03) 5721 7077
Wodonga Ph: (02) 6024 6284
Email: Cathy.McGowan.MP@aph.gov.au

Hon. Bob Katter, Member for Kennedy, Katter’s Australian Party. Leading supporter of banking separation; thank Bob for leading on this issue and ask him to prioritise it in his negotiations.
Innisfail Ph: (07) 4061 6066
Mt Isa Ph: (07) 4743 3534
Email: Bob.Katter.MP@aph.gov.au

Rebekha Sharkie, Member for Mayo, Centre Alliance. Supports separation.
Ph: (08) 8398 5566
Email: Rebekha.Sharkie.MP@aph.gov.au

Andrew Wilkie, Member for Denison, Independent. Supports separation.
Ph: (03) 6234 5255
Email: Andrew.Wilkie.MP@aph.gov.au

* Dr Kerryn Phelps’ parliamentary contacts details are not yet available.

From our friends at the CEC.

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