The trigger for Frank Cicutto's resignation as CEO of the National Australia Bank was the recent $360 million currency trading loss. But the real causes were the $4 billion loss on HomeSide, its US mortgage business, and the poor returns on the NAB's portfolio of small British banks. This matters to all Australians: that $4 billion loss alone cost Australian taxpayers well over $1 billion in lost tax revenues.
Yet no one seems to be asking why NAB ventured abroad so ineptly in the 1990s. The answer has much to do with the Government's "four pillars" policy, which prohibits mergers between our big four banks: the NAB, ANZ, Commonwealth and Westpac.
The policy seems to have electoral appeal. But it flies in the face of the economics of international banking.
Australia's banks fall into two broad categories: the big four and the regionals. The big four want to be international, engaged in the full range of investment and commercial banking activities. The regionals principally want to take deposits and make loans.
Unsurprisingly, regional banks report higher customer satisfaction levels than those of the big four, because branches are central to the business of the regionals. For the big four, branches outside major centres mainly contribute overheads and expenses.
Recent US developments are instructive. Three weeks ago, the third and sixth largest American banks, JPMorgan Chase and Bank1One, agreed to merge. JPMorgan Chase itself was the product of mergers between Chemical Bank, Manufacturers Hanover, Chase Manhattan and JP Morgan. Bank1One was likewise the product of four mergers in the past eight years. They merged to form a bank with the heft to challenge Citigroup, a product of mergers between Citibank, Salomon Brothers, Smith Barney, and Travellers Group.
There is a pattern here. Size matters in international banking. Deep balance sheets support the investment banking activities of modern international banks.
Each of Australia's big four banks competes in this international arena, and seeks growth to be able to do so more effectively. Yet the four pillars policy denies them growth opportunities in the market they know best - our own. And so they move abroad instead.
There is a US precedent, and it is a cautionary one. In the 1970s each US bank was limited to operating within its own state. Citibank could have branches in New York but not New Jersey. Bank of America could service customers in California, but nowhere else in the US. And neither of these commercial banks could engage in any investment banking.
And so the big US banks headed south. They sought to grow by lending to Latin American and African countries - a market they clearly did not then understand. The result was the 1982 debt crisis that bankrupted Latin America and Africa for more than a decade, and very nearly bankrupted the entire US banking system.
US law stopped US banks growing organically at home, and so they tried to grow, disastrously, abroad. Our four pillars policy has the same effect on our big four banks at home, and we are seeing losses from their forays abroad.
The bottom line is that the big four no longer want to be banks in the sense most of us have of that term. They want to provide highly sophisticated, profitable services to corporations and wealthy individuals. It is the regional banks, credit unions and building societies that are focused on the core banking functions of taking deposits and making loans to individuals and small businesses.
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