We keep returning to the subject of Australia and the growing signs that its bubble economy is bursting. Earlier this month, we discussed how the world’s longest-running bull market – 55 years – in Australian house prices appears to have come to an end. We followed this up with “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale described how Australia’s three decades long economic expansion had mostly been the result of “dumb luck”.
As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.
Last week, in "The Party's Over For Australia's $5.6 Trillion Housing Market Frenzy", we highlighted some scary metrics for Australia’s housing bubble - notably how the value of Australian housing is more than four times gross domestic product – higher than other nations with housing bubbles, e.g. New Zealand, the UK and Canada. Two days ago, we noted the number of Australians optimistic about the year ahead had plunged to a record low.
Moving on to the nation’s banks, while Australian households are the second most indebted in the world, its banks are the most exposed to housing debt…
…which doesn’t augur well if, as we expect, the housing bubble deflates. We pointed out that an additional risk for Australia’s banking sector, which certainly wouldn’t help the property market either, was the growing demand for a public inquiry. This follows a series of scandals relating to misleading financial advice, attempted rate-rigging, fee gouging and alleged breaches of anti-money laundering laws. According to Australia’s ABC News.
But the overwhelming reason for an inquiry rests on just one principle — accountability. What has been forgotten in the endless round of scandals in recent years is that the Australian banking sector is a taxpayer subsidised industry. It's an industry that pays ridiculously bloated salaries to its leaders; that showers itself with massive bonus payments when profits are soaring but instantly demands taxpayer protection and support when the tide turns.
Australia’s biggest lender, Commonwealth Bank of Australia, is currently facing a lawsuit from the country’s financial crime agency alleging it repeatedly breached anti-money laundering laws. A class action suit has been launched resulting in to further probes into alleged misconduct. In May, the government announced an additional A$6 billion tax on the four biggest banks along with Macquarie.
Having resolutely opposed a formal inquiry into the banking industry, which happens to be a major political donor, Malcolm Turnbull’s Liberal-National coalition government has finally caved in to political pressure. According to Bloomberg.
Australia’s banks will be subject to a wide-ranging public inquiry after Prime Minister Malcolm Turnbull bowed to pressure to address scandals besetting the industry. The year-long royal commission will examine the conduct of the nation’s banks, insurers, financial services providers and pension funds, and consider whether regulators have enough power to tackle misconduct, Turnbull said Thursday. He pledged the inquiry would not put “capitalism on trial.”
The next part of the story is truly laughable, as the banks suddenly did a 180 degree turn and welcomed an inquiry in a letter which, minutes later, provided the political cover for Turnbull to reverse his opposition. Bloomberg continues.
The announcement came just minutes after Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd., Westpac Banking Corp. and National Australia Bank Ltd. dropped their opposition to an inquiry, saying in an open letter to the government that months of political squabbling over the issue risked undermining offshore investor confidence.
“Ongoing speculation and fear-mongering about a banking inquiry or royal commission is disruptive and risks undermining the reputation of Australia’s world-class financial system,” Turnbull said. The inquiry will “further ensure our financial system is working efficiently and effectively.”
In the letter to Treasurer Scott Morrison, the banks’ chief executive officers and chairmen said that political uncertainty was “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,” the letter said, and urged the 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.”
No evidence of collusion between Turnbull and his banking friends there then. It was merely damage limitation.
“This is not a win for Turnbull -- at best it’s a face-saving exercise,” said Haydon Manning, a political analyst at Flinders University in Adelaide. “He obviously realized that a public back-flip today would be less embarrassing than the potential sight next week of members of his own government voting against his policy position in parliament.”
The announcement follows months of campaigning by the main opposition Labor party and some National party MPs (the junior coalition partner), which demanded a royal commission to investigate the banks’ conduct. A Guardian Essential poll published on 27 November 2017 showed that 64% of Australians were in favour. As for its impact on the banks themselves, Bloomberg reports Moody’s sees it negatively impacting investor confidence.
A royal commission has the power to compel documents and summon witnesses to answer questions under oath. “In the short term, this could be embarrassing and has the potential to negatively impact the banks,” Frank Mirenzi, a banking analyst at Moody’s Investors Service, said by phone. “There may be some waning of investor confidence simply due to the headline risk. However in the longer-term, investors will look through this and focus on the underlying financial strength and well-regulated nature of the banks.”
The inquiry is unlikely to “meaningfully alter” the structure of the industry, Mirenzi said, adding the ratings company’s assumption that the government would support the big lenders in the event of a crisis -- which underpins their high credit ratings -- was unaltered.
The announcement wiped A$8 billion ($6 billion) off the combined market caps of the “big four” banks in early Sydney trading, with Commonwealth Bank declining as much as 2.7%. By the close, Commonwealth Bank was down 1.9%, ANZ down 1.1%, Westpac down marginally and National Australia unchanged.
Betting against Australia’s housing bubble by selling the big four banks has been a “widow-making” trade for years. Maybe, just maybe, that’s beginning to change.