Big Banks, Small Solutions

Australia’s big 4 banks have recently completed a government requested bank inquiry, with the chief executives of each company experiencing a 3-hour grilling from a select group of members of parliament. While the notion behind the inquiry was legitimate and valid, the general consensus is that in large, the inquiry was unsuccessfully executed and fell well short of the banking royal commission that was called for by the Labor Party.

The bank inquiry was induced by the Turnbull government as a result of an unsavoury concoction of behavioural issues, scandals, and debatably unjustifiable bonuses and incentives given to the bank executives. A major reason for the inquiry was the well-publicised issue of the big 4’s unwillingness to pass on Reserve Bank rate cuts to their customers despite notching record-breaking profits for the financial year. To further this sentiment, bank executives ‘continue to be rewarded eye-watering bonuses’ disregarding ongoing scandals that have occurred in their banks, which has led many to question the incentive structure of the big 4.

In regards to ongoing scandals, this refers to incidents such as the Commonwealth Bank (CBA) using outdated medical definitions to deny insurance payouts while being fully aware of the current definitions and practices. Such acts have led to families being cheated out of legitimate life insurance payouts. Furthermore, 2014 brought the revelation of financial planning scandals among the banks. The scandal consisted of financial planners providing poor advice, as well as forged signatures, unreliable compensation schemes, and as a result has been a highly influential motivator for a banking royal commission. Not only was Commonwealth involved, but NAB as well as Macquarie Bank. NAB has since paid over 750 customers between $10-15 million in total, while CBA reports that the bank has worked through 91% of its files. However, the question remains as to why it has taken so long to compensate the victims of the financial planning scandal.

The bank inquiry, occurring between the 4th and the 6th of October, could be said to have had no clear outcome despite 720 minutes of question-and-answer between both Liberal and Labor MP’s and the 4 chief executives. While there are no doubt numerous reasons for the inquiry, it failed to reach any proper conclusions or solutions. Instead, it can be said the executives beat the politicians at their own game, employing the use of non-answers, apologies, and promises to do better. What was essentially non-existent was scope to investigate further into the banks actions, nor the opportunity to ‘forensically pull apart the “we have market costs” arguments.’ There was also a lack of specific accountability, with only Westpac’s CEO Brian Hartzer admitting that as a result of a scandal in their finance business Capital Finance Australia, the senior executive in charge was no longer a Westpac employee.

What was evident was a common theme in the problems concerning the banks. Analysts of the inquiry found that behind the blaming of rogue employees and poor enforcement was a notion not addressed by the executives – bad incentives. Incentives for employees of the big banks are aligned with the banks success – this means the bottom line and the banks share price, so that employees will strive towards these goals through any appropriate means available. Unfortunately, the pursuit of profit will almost always contradict the best interests of the customer and therein lies the larger problem and catalyst for scandalous behaviour if incentives are so purely based on the bottom line.

In a bad year for banks overall on the stock market, the bank enquiry could have proved particularly significant for VIP, which holds 3 of 4 of the major banks (CBA is not held). However, each stock value increased on Thursday the 6th, perhaps indicative of the insufficient ability of the government to reach any proper solution or conclusion, or perhaps indicative of the confirmation that the banks interests are very much aligned with their own return and thus the shareholders.

Source: SMH, ABC