Bank leaders warn of inquiry jitters

Some of the nation’s banking leaders say foreign investors are increasingly expressing concerns about the push to hold a Royal Commission into the industry, flagging that banks may have to pay more for funds in offshore wholesale markets if confidence deteriorated.

At an event hosted by The Australian and BHP Billiton in Sydney yesterday, Westpac chairman Lindsay Maxsted said the banks’ ability to attract both deposits and funds in wholesale debt markets was critical to the functioning of the economy. Mr Maxsted said the prospect of a Royal Commission or Commission of Inquiry into the banks was “very dangerous” because it made offshore investors question their belief that Australia had “one of the safest and most secure and stable banking systems in the world”.

“The most important thing about banking and Australia and the role of banks…is having a strong system that attracts those deposits and from there out they go. They go out to help consumption, to help expenditure, to help small business, large business do their stuff,” he said.  

While the big banks source the majority of their funds from deposits, they still rely on raising funds from wholesale markets to then on-lend to customers.

National Australia Bank chairman Ken Henry said while investors were not yet asking the banks to pay higher prices for debt in wholesale markets, they were asking questions about the political environment.

“We are getting increased amounts of people saying ‘what the hell is going on down there’,” he told the event.

Mr Maxsted agreed pricing of bank debt was not yet being affected when investors assessed where to put their funds. This was partly due to the massive amounts of liquidity injected into markets in the past decade. But that could change.

“We’re still regarded, thankfully…the Australian banking system, as a good destination for those funds. (But) if we continue to go down certain paths, I fear that may happen,” Mr Maxsted said.

It comes amid a renewed push for a Commission of Inquiry into the banking sector by some senators. The Labor party has already committed to holding a Royal Commission if elected at the next Federal Election, a position supported by the Greens. A Commission of Inquiry is similar to a Royal Commission, but is set up by Parliament and reports to Parliament, rather than the government. The Coalition has opposed the move, reiterated by Finance Minister Mathias Cormann at the event yesterday.

Commonwealth Bank chief executive officer Ian Narev said he was quizzed about the prospect of a major inquiry into the banks during his recent post results investor roadshow.

“I spent 50 hours with investors in the UK and US in October and November and in every single meeting, every single meeting, I was asked ‘why do we think you’ve got one of the strongest banking systems, but it doesn’t look like the political system shares that view’,” he said.

Recalling a period when he was Treasury Secretary in late February 2008 just before the peak of the global financial crisis, Mr Henry said then Prime Minister Kevin Rudd asked him what was the “worst thing that can happen”.

“I said ‘well the worst thing that can happen is that the rest of the world stops lending to Australia’s banks and the banks can therefore not to continue to lend to the Australian economy, businesses and households and so on’,” he said. “Australian banks are absolutely at the centre of the proper functioning of the Australian economy. (If) the Australian banks do not play that role, the Australian economy doesn’t work, the social consequences would (have been) truly catastrophic.”

Anna Bligh, chief of The Australian Bankers’ Association, said a royal commission could take years at a time when banks were facing disruption from offshore major technology companies and already acting to fix past issues amid “the most intense period of reform that the banking industry has seen in Australia since its ­inception”.