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Reforming the revolving door between banks, regulators and legislators

By John Murray - posted Tuesday, 24 April 2018

In Ends and Means, published in 1938, Aldous Huxley observed:

In the press, which is owned by rich men, the interests of the investing minority are always identified (doubtless in perfectly good faith) with those of the nation as a whole. Constantly repeated statements come to be accepted as truths.

For decades Australians have been told, by media outlets which rely upon advertising revenue from banks, that a strong economy requires strong banks and minimal banking regulation. Politicians repeat the mantra at every opportunity. We have been told constantly that the interests of the banks and their investors are, if not identical, then at least broadly congruent with our own interests, and we have come to accept this as true.


That this is untrue should be obvious to everyone, and is easily demonstrated. For example, it is in the interest of a bank to extend so much credit to a person so that that person can afford only to make only the minimum monthly repayment, and therefore be in perpetual debt. It is in the interests of a bank to inflate the price of residential property so that the average person needs to borrow more money to buy the average house. None of this is in the interests of the citizenry or society as a whole. The interests of banks and the interests of society are therefore opposed to a significant degree.

Banks, being corporations, exist to make money for their shareholders. Directors of banks have a fiduciary duty to maximise the value of the company for the benefit of the shareholders of the company. This is a legal duty and bank directors can be held personally liable if they breach it. It goes without saying that directors have the added motivation of market performance-related bonuses. They do not get bonuses for being prudent, careful or cautious, or for putting anyone's interests above their own or that of their bank.

It is of course a perfectly reasonable thing that people with a greater than usual affinity for money should rise to executive positions in banks. But the people who make decisions about banking practices (for example, regulators at the Australian Securities and Investment Commission and the Australian Prudential Regulatory Authority), should not share the motivations of bankers. They should be people with different motivations. They should be as much interested in the welfare of the larger, less wealthy portion of our citizens than the welfare of the smaller, wealthier minority. They should not have one eye on a future position as a banker, nor should they have recently come from a bank. Because their job is to protect society from the instincts of banks and the instincts of bankers. Bankers, if not adequately supervised, will take risks in the pursuit of profit which endanger even the banks themselves, which is why banking failures, crises and bailouts occur so regularly all around the world.

This, then, is why we have banking regulation. We regulate banks to ensure that they, and the people who run them, do not pursue their interests at our expense. Banking regulation exists to protect us from the banks, and protect them from themselves. The evidence we are hearing from the Banking Royal Commission leads unavoidably to the conclusion that banking regulation in this country has failed us. We are soon to discover how serious the consequences of a failure of banking regulation really are. As we deal with what will very probably soon be acknowledged as a banking crisis, we also need to seize the opportunity to reform banking laws and regulations for the benefit of all Australians.

Many other countries address the regulatory "revolving door" by imposing cooling-off periods or post-employment restrictions of various kinds. Even stricter regulatory models exist in Australia already. In order to ensure the integrity of a commission which investigates allegations of police misconduct, investigators must be set apart from those that they investigate, which is why Commissioners of the NSW Law Enforcement Conduct Commission cannot be former police officers. We as a society need to consider applying this principle to banking regulation. No executive who makes decisions which affect the conduct and profitability of the banks should be a former banker, and nor should their ever go on work for the firms that they have previously been responsible for regulating.

We have entrusted the banks with a monopoly on money creation. If we are to grant a monopoly on the creation of money to entities which are without moral compass run by people motivated solely by self-interest, then that grant must come with some very serious regulatory strings attached to it. Do we really think that light-touch regulation is enough to contain the instincts of the banks and their executives? The evidence from the current Royal Commission leaves us in no doubt: the regulators are utterly ineffective. Tougher penalties for infringements are not enough to solve the problems identified by the Commission because regulators do not properly enforce existing rules and penalties.


The failure of banking regulation will only partly be addressed by strictly separating the regulators from the firms they regulate. The people making and administering the laws also frequently end up working for or lobbying on behalf of banks. Former legislators and senior public servants should also be ineligible to receive income from banks when they leave their positions.

The banks and the media outlets who carry their advertising can no longer fool us into believing that their interests are identical with our own and that they should be able to pursue their interests with as little regulatory encumbrance as possible. Nonetheless, reforming the banking sector will be difficult. This is the perennial challenge of regulatory reform: there are so many people with vested interests in maintaining the status quo standing directly in the way of reform. This is why banking regulatory reform should start with addressing the revolving door. As we reform our laws to dig us out of the crisis that decades of collusion between banks, regulators and parliaments have put us in, our legislators and regulators will have to make decisions about whether to regulate in the interests of the banks or the interests of the people.

As Kevin Rudd would attest, taking on vested interests in this country is fraught with danger, even for Prime Ministers. But the current Commission isn't a news story which the media will move on from in time. It could very well signal the end of the era of light-touch regulation and the beginning of a new era of regulatory reform – that is, if enough of us demand it, and if our political representatives are brave enough to take on the task.

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About the Author

John Murray is a former lawyer and parliamentary researcher.

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All articles by John Murray

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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