Why Australia urgently needs a Glass-Steagall banking separation

The U.S. Congress is now considering a bill, H.R. 129, to re-enact the Glass-Steagall Act 1933, which split commercial banks that hold deposits off from risky investment banks. The Glass-Steagall Act protected America's depositors until its repeal in 1999 led directly to the Wall Street megabanks, their reckless gambling losses that caused the global financial crisis, and the trillions of dollars in government and central bank bailouts.

Politicians in Italy, Iceland, Belgium, Sweden and Switzerland are working on Glass-Steagall laws; and more than 60 per cent of British MPs support a fullscale Glass-Steagall-style separation for the U.K.

Australian politicians must recognise that the financial danger their international counterparts are acting to avert is a global threat from which Australia is not immune, and move urgently to enact a Glass- Steagall separation for the Australian financial system.

Risky business

Four major banks—CBA, ANZ, NAB and Westpac—dominate Australia's financial system. The same banks dominate New Zealand. The IMF noted with concern in November 2012 that the level to which the domestic financial system is concentrated in these four banks, which between them hold 80 per cent of Australian residents' assets, makes them systemic—a crisis in these banks is a crisis for the entire system.

The big four banks are each conglomerates, combining the traditional banking of deposits and loans with the riskier financial activities of investment banking, funds management, stockbroking, and insurance. This structure is precisely what the architects of the Glass-Steagall Act recognised posed such a risk to the security of depositors.

There is an assumption that the big four won't get into crisis, as they are the strongest banks in the world. This is the same assumption that every nation presently in financial crisis held about their own banks when they were riding high. Not only was it proved wrong for those nations, it has already been proven wrong for Australia. The supposedly "sound" Australian banks almost went bankrupt when the GFC erupted in Sep.-Oct. 2008, unable to repay their enormous foreign debts, and had to beg the Rudd government to go guarantor for new foreign borrowings to roll over their existing loans. The banks told Rudd that without the government guarantee "they would be insolvent sooner rather than later", recounted Ross Garnaut and David Llewellyn-Smith in their book The Great Crash of 2008. They are still teetering on the edge. From its recent analysis of the Australian financial system, the IMF expressed concern that Australia's banks have only six per cent capital. This enables the banks to rack up bigger profits, but it leaves them extremely vulnerable—a six per cent decline in the value of their assets will wipe them out.

Adding to the structural vulnerability, the four banks are very similar businesses:

The four banks are also heavily reliant on foreign loans. More than half, $802 billion as of Sep. 2012, of Australia's gross foreign debt is owed by banks, the majority of that by the big four. $513 billion is short-term debt, one year or less maturity; $340 billion is 90 days or less. It is this short-term debt which virtually bankrupted them in 2008.

Australians call for Glass-Steagall

A number of Australians with intimate knowledge of the Australian financial system have called for Glass-Steagall. The most prominent is former NAB CEO and BHP Chairman Don Argus. Argus told the 17 Sep. 2011 The Australian, "People are lashing out and creating all sorts of regulation, but the issue is whether they're creating the right regulation. What has to be done is to separate commercial banking from investment banking. I challenge any commercial bank board to really understand investment banking risk. It's different and needs to be properly priced. But you actually don't want it on a commercial bank balance sheet that comprises depositor funds."

The 6 Aug. 2012 Australian Financial Review reported an unnamed "retired senior local banker" who was raising "concerns about the potential for a local bank to get into strife". Under the headline "Big four might make a better eight", the AFR revealed that their source, careful to remain anonymous due to his present position, echoed Wall Street banker Sandy Weill's call for Glass-Steagall: "Australia's banks were too big and complex and should be broken up".