How much bank profits can we afford?

[SIGI]

Perhaps I should be more clear - I'm not bashing banks. I have no axe to grind over CEO pay or bankers bonuses. Neither am I suggesting that the banks have any responsibility to anyone other than their shareholders. I'm just making a simple economic observation, the large profits imply, to me, that there could be room for more efficiency in the sector.
I'm afraid that I don't see the direct correlation between the size of the B/S and the risk of a bank. Size is a factor, but there are may others.
If for example we had a smaller 16 instead of the big 4, would these institutions be a greater risk to customers by virtue of their size? Or perhaps the quality of their B/S would be more important. They would still be very large institutions, meeting Basel cap. requirements may indeed mean a higher proportional cost for a bank with a smaller mkt cap, but perhaps also the trade off vs more competition would mean the consumer could still come out ahead?
My comment re more even distribution of profits/market share amongst other players stems from the sticky nature of bank customers. If the market were more efficient I would expect the profits and market share of the big 4 to fall and those of the smaller player to rise more quickly.

I understand why the banks rates don't move 1:1 with the RBA, I simply think they can do this because customers are sticky. If they were not, they would not be quite so fast to do this. BTW one assumes they were making a profit on the bid/offer before the rise - so increasing in line with the RBA would still afford them almost the same profit.

alphaman -laziness won't get you a better deal. But accepting that bank customers are sticky and doing something about it, is not so different to implementing compulsory super. In some areas we already facilitate change.
Mofra - good point. But only begs another question - if a system is too big to fail, why are the shareholders afforded the implied free insurance and why are they the only ones to gain from the monopoly/duopoly status. Perhaps the gov should have a few shares!
medicowallet - you seem happy with the idea that we all take personal responsibility for ourselves. I agree with you. Would you apply this logic to all areas - compulsory super, universal healthcare, education. We're just drawing lines in the sand here, why stop with banking?
Julia - At no point did I imply that the banks were bailed out by taxpayers. I boldly stated that my belief is that one would have been if it were necessary and I admit I could be wrong! I don't share your confidence, even in hindsight, that there was no likelihood of it being necessary. If the GFC had killed demand for raw materials, the Oz economy had faltered, just maybe Oz house prices (some of the highest in the world) could have fallen - then I imagine the banking sector would not have looked quite so rosy. Furthermore, the Australian Government at the time offered a guarantee of customers funds. This guarantee has a value not only to the customers, but also the banks themselves, and a cost.

What I would prefer? I don't think I'm qualified to offer a sensible structure. I would certainly like to see what a completely free financial market would end up looking like, we might end up back where we started, we might not. Facilitating a simple 1-click moving of banking services from one bank to another would be a good starting point.

I reiterate I'm not suggesting that the banks have any responsibility to do anything. But I am interested to know, does everyone else think the Oz banking sector is as efficient as it gets? Is $20bn profit a fair price tag to pay for what we get? Would you leave everything as is, or would you like to see some sort of change?

 

[alphaman]

SIGI, no one forced the consumers to be "sticky". If consumers choose to stick with the big 4 and ignore better alternatives, the inefficiecy is caused by the consumers, not the system. Making the system the scapegoat is not going to help the inefficient consumers.

 

[prawn_86]

SIGI, no one forced the consumers to be "sticky". If consumers choose to stick with the big 4 and ignore better alternatives, the inefficiecy is caused by the consumers, not the system. Making the system the scapegoat is not going to help the inefficient consumers.

From a marketing perspective ad spend plays a large part in loyalty (or 'stickiness'). This is called Double Jeopardy, meaning those that spend more can attract and retain more customers, and those who cannot afford to spend as much, due to not being as big, struggle to get their message heard.

So it's unfair to solely blame consumers. Yes there are alternatives out there, but they need to be sought out, as opposed to large salient brands who can spend a lot on marketing

 

[Kremmen]

Do you own bank shares:

Especially here, that should be the question. If you think a company is making unreasonably high profits, surely you should be investing in them? If you can find better investments elsewhere, then how "evil" can the banks really be?

The thing with banks is that by default, they have a monopoly over all industries.

We have more than one bank. It's not a monopoly.

A cartel is nearly always bad for consumers, in this case it certainly is.

If you want a competitive capitalist environment, you must have competition, the more competition, the better for the consumer (regulation of the market is another story).

This is just totally untrue. There are huge economies of scale and advantages of few participants regarding efficient interactions between them. Competition is good, up to a point, beyond which it becomes totally counter-productive and inefficient.

I've never paid any fees on any deposit/debit accounts in my life. If customers don't like the fees but aren't prepared to change, they have little grounds to whinge.

You are quite right there are more than 4 banks in Oz - but the point is whether the dominance of the big 4 is beneficial to consumers

Absolutely. There are huge advantages.

Would you prefer a small number of large banks controlling a significant share of the market, or a large number of small banks each controlling very little?

Definitely a small number of large banks. Let's compare with the USA, which has thousands of small banks.

* Here: Ubiquitous free bill-paying with BPay. USA: Total shambles, most of it costing fees, with many small institutions still sending "electronic" payments by physical cheque. (Why do you think Paypal exists?)

* Here: Ubiquitous cheap or free direct credit to other bank accounts. USA: Total shambles, again.

* Here: Direct deposits into your account happen reliably same night. USA: Depends on the bank. Might be tonight. Might be tomorrow night. Maybe the next day.

* Here: Simple ATM use all around the country. USA: Various cross-usage schemes. Again, shambles.

* Here: Every bank that I am aware of (apart from INGDirect and similar) is on SWIFT and can directly send/receive money to banks overseas either in AUD or another currency, overnight. USA: Many small banks don't bother, so the only way to get money in/out internationally is through an intermediate bank in USD, which involves extra fees, delays and manual intervention.

 

[medicowallet]

medicowallet - you seem happy with the idea that we all take personal responsibility for ourselves. I agree with you. Would you apply this logic to all areas - compulsory super, universal healthcare, education. We're just drawing lines in the sand here, why stop with banking?

Off topic,

but here I go:

The overarching theme in the above is a fair go for the masses, ensuring them a minimum standard, so that all have a social safety net and access to opportunity, regardless of social class. The difference is for the three you list, the alternative is not appealing in the social context we come to appreciate in Australia.

and for the record, NO, Mcmansions should NOT be the norm.

1. For healthcare for the masses there is little choice for them, as they cannot afford expensive medical bills. This is a social service highly subsidised by higher earners, which on the surface seems fair for all.

People CHOOSE to take out a $400k mortgage, their other option, and a perfectly viable one, is to rent.

2. Compulsory super - this is an insurance policy so that future generations need not subsidising the pensioners of tomorrow (like the coming ridiculous BB generation social dependent masses). It also ensures that people will have adequate living standards when they retire (and yes, on super, so much could be done to improve it)

3. Education - as a community we should NEVER allow our talent to be confined to just those with parents who had the money to send their kids off for the best education. Just imagine the minds in places like America, india, china etc that could be harnessed if they had the same opportunity we have here.

 

[nioka]

Especially here, that should be the question. If you think a company is making unreasonably high profits, surely you should be investing in them? If you can find better investments elsewhere,

Huge profits by a company does not mean that the average shareholder gets the benefit from owning that companies shares. This especially applies to the big 4 banks. There are definitely much better investments elsewhere.

 

[SIGI]

SIGI, no one forced the consumers to be "sticky". If consumers choose to stick with the big 4 and ignore better alternatives, the inefficiecy is caused by the consumers, not the system. Making the system the scapegoat is not going to help the inefficient consumers.

"Force" comes in many guises. Ad spend as noted by prawn_86 is a biggie, the complexity of moving institutions is another, lack of financial education is another (not everyone has access to the net or would know what to do with it if they did!). The consumers are sticky - that's not my opinion, it's just how it is. My point is that, if we know, then we can choose to do something about it. We may choose to change the system in ways to help inefficient consumers. Just because some people are financially astute, is it fair to assume everyone else is, or for that matter could be if they tried?
As I said we already tweak the system in other walks of life, like compulsory super. Why not tweak other sectors (like banking) where we see the opportunity, to see if we can all get a better service for less money, not just the savvy/smart, but for everyone?

 

[prawn_86]

Why not tweak other sectors (like banking) where we see the opportunity, to see if we can all get a better service for less money, not just the savvy/smart, but for everyone?

Personally i think the answer to this is that most of the finance industry is built on being opaque, and the more transperancy, the less profits.

So its a delicate balance of keeping people employed, earning enough cash for shareholders, and keeping people stupid enough to make enough money...

 

[SIGI]

Kremmen: you are quite right - I overstepped the mark with the "cartels are always bad", fingers moving faster than brain. There are indeed areas where it makes sound economic sense for there to be few players.
Retail banking in Oz however, could tolerate a lot more competition before we start seeing the inefficiencies you have noted in the US system.
I stand by the point that the profits of the retail banking rector in Oz indicate that there should be efficiencies to be made. See previous thread re: sticky nature of customers. The perceived competition is not as great as it would seem.
The fact that the US system had not got it right does not, I believe, preclude a better system from operating in Oz. Bpay/credit link/direct deposit/multi access ATMs can all function with 20 banks rather than a dominant 4. What's more it might turn out to be cheaper!
On another note look at the UK system, not a great deal of competition after all the consolidation, but with the arrival of the supermarkets, more accessible competition and it's all good for consumers.

prawn_86: You've hit the nail on the head there "sunlight is the best disinfectant".

 

[alphaman]

From a marketing perspective ad spend plays a large part in loyalty (or 'stickiness'). This is called Double Jeopardy, meaning those that spend more can attract and retain more customers, and those who cannot afford to spend as much, due to not being as big, struggle to get their message heard.

So it's unfair to solely blame consumers. Yes there are alternatives out there, but they need to be sought out, as opposed to large salient brands who can spend a lot on marketing

I agree, but I fail to see how that's inefficient. Advertising and size are both costly, and do not guarantee success. If you can execute a good advertising compaign, if you can get your message across, of course you deserve to be rewarded.

And yes, people do need to seek out the alternatives. I'm stunned that people seem to think that they can just sit on their butt and government would give them all the bargains on a platter. This is really about laziness, not about market inefficiency at all.

 

[medicowallet]

I sigh at the suggestions that we need to "tweak" the financial system to help those who were too naive and full of bravado, pulling on $400k loans on $60k income.

Give me a break. They are beyond help.

Let the banks deal with the bad debts, and let the consumer learn the lesson that there is not a guaranteed windfall in gearing to the hilt and purchasing property.

Any tinkering with real market forces, actually dumbs down the general public, and makes our economy weaker going forward. People need to learn about risk and reward, which is not being helped by constant government bailouts.

The govnent have already shown incompetence with Kevin Rudd and his cash grants/bailouts and wasteful wanton destruction of national wealth. Let us not feed the fire any more.

THAT is what interest rates do, or used to do before people became naive to the reality of risk and reward.

 

[alphaman]

Any tinkering with real market forces, actually dumbs down the general public, and makes our economy weaker going forward. People need to learn about risk and reward, which is not being helped by constant government bailouts.

Amen to that.

 

[prawn_86]

I agree, but I fail to see how that's inefficient. Advertising and size are both costly, and do not guarantee success. If you can execute a good advertising compaign, if you can get your message across, of course you deserve to be rewarded.

And yes, people do need to seek out the alternatives. I'm stunned that people seem to think that they can just sit on their butt and government would give them all the bargains on a platter. This is really about laziness, not about market inefficiency at all.

I would argue that it is about market inefficieny as the big 4 have been protected for a long time (relative to smaller banks/lenders etc), hence have more power and revenue in order to spend more on advertising.

As you implied before, a true capitalist market, should have little to no regulation. If this was the case then the big 4 wouldnt be in th eposition they are today.

 

[alphaman]

I would argue that it is about market inefficieny as the big 4 have been protected for a long time (relative to smaller banks/lenders etc), hence have more power and revenue in order to spend more on advertising.

Exactly what protection are you talking about? Anyway that's probably irrelevant.

My observation is that even within the big 4, you can find good deals if you look. But people don't even try to shop around within the big 4.

By the way a true capitalist market does not exclude regulation. If the regulation promotes honesty and transparency, it obviously enhances market efficiency. But if you are talking about government price control, then that does contradict. A lot of people talk about free market but they don't really mean it, they just want the government to bring down the price.

 

[IFocus]

I sigh at the suggestions that we need to "tweak" the financial system to help those who were too naive and full of bravado, pulling on $400k loans on $60k income.

Give me a break. They are beyond help.

Let the banks deal with the bad debts, and let the consumer learn the lesson that there is not a guaranteed windfall in gearing to the hilt and purchasing property.

Isn't that how the sub-prime evolved........

 

[doctorj]

I'm afraid that I don't see the direct correlation between the size of the B/S and the risk of a bank. Size is a factor, but there are may others.

Size and market share are key rating factors for all the major international rating agencies (S&P, Fitch, Moodys, AM Best). All things being equal, a bank with 3% market share will have a lower rating than a bank with 10% market share. In fact lower market share effectively places an upper limit on the rating (or makes the amount of capital required to attain a higher rating unreasonable).

 

[medicowallet]

Isn't that how the sub-prime evolved........

Exactly, by governments allowing banks to give cheap loans to people who could not pay for them.

All we do by allowing our fellow Australians to keep going deeper into the abyss is condemn them to further slavery to the banks and risk.

 

[Julia]

And yes, people do need to seek out the alternatives. I'm stunned that people seem to think that they can just sit on their butt and government would give them all the bargains on a platter. This is really about laziness, not about market inefficiency at all.

Exactly so.
We are becoming far too accustomed to adjusting everything to cater for the laziest in our society. viz e.g. "My Super" for people who can't be bothered to understand how best to manage their Super options.

I
Any tinkering with real market forces, actually dumbs down the general public, and makes our economy weaker going forward. People need to learn about risk and reward, which is not being helped by constant government bailouts.

I absolutely agree, but wonder if we are here being a bit unfair in not giving adequate recognition to those who - despite all the urging and encouragement in the world - will never develop even the most basic financial comprehension?

 

[Julia]

I would argue that it is about market inefficieny as the big 4 have been protected for a long time (relative to smaller banks/lenders etc),

Can you set out how exactly the big four have been protected?

 

[medicowallet]

I absolutely agree, but wonder if we are here being a bit unfair in not giving adequate recognition to those who - despite all the urging and encouragement in the world - will never develop even the most basic financial comprehension?

The shotgun approach is not the way to deal with this, as it eg in the case of the FHBG tripling, leads to bubbles / abuse from people who actually are smart enough to use this to their advantage.

It will come across as cold, but people who are constantly bailed out will never learn. I would be hard pressed to find people who had been forced to sell their property who would approach the next investment with no greater analysis.

Perhaps these people should never be put into a position to ever purchase a house I agree.

I would however support the government doing such things as independent screening of loan application repayability for people who want to access the FHBG. This would actually be quite responsible of the government, but therefore will never happen (they don't even know if their own projects will show good returns)