Time to go back to basics for the Australian banking industry

Stirring beneath the Banking Royal Commission and amplified by the recent interest rate hikes is a sense of agitation amongst the Australian public that things can be better when it comes to banking in Australia.

The four pillars policy probably insulated Australia against the 2008 financial crisis and helped the country avoid the Great Recession. Australians, however, still generally feel uneasy about their banks. There is a lurking suspicion (if not an outright belief) that the big banks aren’t being ‘fair dinkum’ to regular Aussies. Scandals like Storm Financial and the recently revealed AMP ‘fee for no service’ row have fuelled this perspective. Ordinary Australians are at a loss. They feel things aren’t right but have no idea what an alternative banking system might look like.

Looking forward, innovations in financial technology (FinTech) might hold some respite. Technology will give people more choices, better and more up to date information and vastly enhanced control over all their finances. New online banking service providers, such as Xinja, don’t have a tradition bricks and mortar presence and might provide a viable alternative to the established players. They are targeting the so-called ‘digital natives’.

Greater sophistication, however, may not placate the hole Aussies feel in their hearts (and their wallets) in relation to their banks. Is it possible that this uneasiness and yearning for change is not necessarily about further advances in banking technology? Could it be that what Australians might actually want is something new, different and much more traditional? 

About 8 years ago, in November 2010, a private members bill was introduced into the UK Parliament. The bill had no chance of ever becoming law. Its purpose was to spark debate and remind British citizens about what the nature of banking is all about. The bill was titled the Bank Customer Choice, Disclosure and Protection Bill 2010. The members who moved the bill were two Tory MPs, Douglas Carswell and Steve Baker.

The contents of the draft law were radically traditional (if one can even say that) and represented one of the most refreshing re-evaluations of banking in western liberal democracies in a very long while.

Although what the bill sought to achieve was quite extreme by modern standards, the ideas put forward have their roots in traditional banking practises going back to 17th century goldsmiths.

The bill proposed that all bank customers be given the option of depositing their money in a ‘Custodial Deposit Account’ (CDA). A receiving bank would be required to keep and hold that money for the customer and maintain 100 per cent reserve of available cash for all such ‘demand deposits’. That is, for every pound deposited into a CDA by a bank customer, the bank must have the equivalent liquidity at all times on call. Customers would be given the choice to either allow the bank to use their savings for ‘Lending Intermediary Services’ or merely hold the funds in a CDA for safe keeping.

Many ordinary Australians might naively believe that this is what already happens. Most are blissfully unaware of reserve-ratio lending and that their funds are loaned out many times over. That’s why banks close their doors during a financial crisis. A ‘run on the banks’ is a death spiral as it exposes the charade. Panic naturally ensues when people begin to realise that there isn’t enough money to go around. Although the Australian Prudential Regulatory Authority (APRA) does have a role in ‘keeping the bastards honest’, not even APRA can guarantee that your money will be there when you need it.

Under the provisions of this particular UK proposal, a bank customer may decide whether to allow the bank to use their funds for loans to prospective borrowers. If a customer does engage the bank’s services as a loan facilitator, all the profits made under the loan would flow to the original depositor. The bank would only make a profit from fees charged for its intermediary lending services. The bank would thus no longer really be a business as we currently now know it, but rather merely an intermediary or a service provider much like the post office.

Interestingly, in ninetieth century Australia, many post offices also operated as savings banks. When debate at the Constitutional Conventions in the 1890s turned to the issue of the new Federal government taking over post offices, several colonial governments were in uproar. They vehemently objected and feared the new Federal government would take away this vital source of loanable funds (particularly for expenditure hungry colonial governments). 

It is difficult to imagine banks and the banking industry as anything other the massive commercial enterprise we see today. The idea of banks providing a social service, however, is not new to Australian law. The long-established definition of banking under the Australian Constitution, articulated by Justice Isaac Isaacs in the 1916 case of State Savings Bank of Victoria v Permewan, Wright & Co Ltd (1914) 19 CLR 457 (at pages 470-471 for those to whom this matters) is that banking is ‘an instrument of society’. This idea has been supported in several cases and judgements many times since.

In the famous 1948 Bank Nationalisation Case, Evatt KC (former Justice Evatt who, at this point, had left the bench to serve as Attorney General for the Chifley government) made submissions to Privy Council arguing that banking was not and had never been a business but was merely a service ‘akin to the postal service’. Evatt had reason to cast banking in such a manner. Labor was attempting to circumvent the s92 constitutional requirement that trade and commerce across state be ‘absolutely free’. Evatt cleverly argued that banking was not ‘trade or commerce’ and therefore any interference with the banks was not prohibited under s92. The Chifley government ultimately lost the case although the Court was divided on this particular point. The final decision was largely based on other grounds (being the acquisition of property on other than ‘just terms’).

The point is that banking in Australia was not always conceived in business terms. These days, it’s probably down right impossible for any Australian to wrap their head around the idea that banking is not a business – and a ‘big business’ at that. Along with the big miners, such as BHP, Aussie banks are a fundamental part of the Australian economic success story.

The failure of the bill proposed by Carswell and Baker does not mean that the ideas they presented are without merit. Rather, it merely shows the power of vested interests and the inertia of the economic status quo. For Australians, the model of banking as a social institution gives them an alternative vision and an inkling of what else can be done to fight, reel in, or at least change the trajectory of banking in Australia.