When one of our big banks is on the ropes, as Commonwealth Bank will be on Wednesday when it announces a billion-dollar profit amid a money laundering scandal, it’s easy to forget whose interests are at stake.
Shareholders are right to be concerned about potentially illegal activities, but from an economic point of view we should all be just as worried about its legal operations.
That point is often lost, because when a hair is touched on the head of any of the big banks, they love to point out that most everyday Australians are their shareholders.
Actually, it’s not that simple. Young Australians hold a tiny fraction of the bank shares held by their parents’ generations, and they’ve missed the once-in-a-century boom that made it that way.
Younger Australians have to borrow more to buy a home, have less money left to put into shares or other investments, and won’t benefit from the run-up in share prices that their parents saw during the 1990s and 2000s.
And most of the history that got us to this point was about the excesses of legal, not illegal behaviour.
The big bank problem
Today is the perfect day to mull over this fact because we are now exactly 10 years out from what many historians consider the ‘start’ of the sub-prime crisis.
On August 9, 2007, the French bank BNP Paribas became the first major finance house to write down the value of its troubled ‘sub-prime’ mortgage funds.
For the first time since sub-prime lending had taken off in the early 1990s, BNP Paribas was telling the market that it had no idea what the mortgage-backed securities inside those funds were worth.
The sub-prime wobbles spread from bank to bank and reached a crescendo in the US when the iconic Lehman Brothers investment bank collapsed in October 2008.
The stock market plunge and ‘credit crunch’ that followed is what we now refer to as the global financial crisis.
While that tsunami of pain was felt in Australia, our big banks fared pretty well, and after a terrifying couple of years they got on with growing even bigger.
When you break down the numbers, their growth over two decades has been astonishing.
CBA is a prime example. Back in 1996, at the end of its three-stage privatisation, it was worth about $8.5 billion, or $14 billion in today’s dollars. That was the ‘market capitalisation’, or the number of shares on issue times their traded price.
Twenty years on, its market capitalisation is almost exactly 10 times in inflation-adjusted terms – $140 billion.
Some of that growth was to be expected, reflecting growth in the economy and the population. But 10 times bigger?
The Australian economy is now almost exactly twice the size it was in 1996, with GDP growing from $850 billion (in today’s dollars) to $1.7 trillion over the period.
What that means is the CBA is now five times the size it was, relative to the overall economy – and all (or mostly) achieved within the law.
Bad government policy, loose monetary policy and prudential regulations that were tightened far too late in the day have allowed our banks to become just too big.
Like the other banks, CBA’s post-GFC growth is not due to world-beating products and customer service, but to the fact that Australia dodged the GFC recession by encouraging even higher levels of mortgage debt.
The banks were encouraged to lend hand-over-fist, first by the panicking Rudd and Gillard governments, then by the ideological Abbott government, and now by a government that has chosen to pretend the resulting debt bubble doesn’t exist.
So yes, let’s see CBA prosecuted for any legal transgressions it has perpetrated.
But let’s pause to remember that it was a bonanza of legal lending around the world that caused the lost decade that followed the sub-prime crisis.
And while we’re at it, let’s stop conflating what’s good for Australia with what’s good for CBA or the other big banks.
They just aren’t the same thing.