Will Bailey, former head of the ANZ bank, gained widespread media coverage during the Federal election campaign over his call for a public inquiry to examine the effects of bank deregulation and to investigate the feasibility of establishing a new government-backed development bank.
Peter Westmore, President of the National Civic Council, interviewed Mr Bailey for ‘News Weekly’ on the issue.
Peter Westmore: What do you say to your critics who point to the failure of several State banks and argue that governments have a poor record in banking?
Will Bailey: If the Federal Government cannot put in place a structure to control a bank then we should not trust it to run the economy. That’s a much bigger job.
In fact, the Federal Government does control a bank. It owns, on behalf of the community, the Reserve Bank of Australia. It appoints the bank’s board. The Reserve Bank’s board is responsible, to the community, through the Federal Government.
The Reserve Bank also prints our currency, which it issues to the commercial banks at a discount rate.
The Commonwealth Bank was a government (community) owned bank, until it was privatised as part of the deregulation process, and it was certainly not a failure. The failure of several State banks some years ago was the result of their boards’ allowing management to move away from their core business into areas in which they lacked experience and the requisite skill.
PW: Why have you suggested that a government-backed development bank may be needed in Australia?
WB: In other countries there are different banks with different charters providing different services to different sections of the community. A few are extremely large and have impressive track records. Currently there is no such institution in Australia.
A development bank could assist a person with a good business idea but without substantial assets. That person may need a couple of years to get the business off the ground. Interest and repayments would be tailored to the expected cash flow of the business. The loan may be for 8, 10 or 15 years or more.
Over its 30-year period of operation, the now defunct Commonwealth Development Bank, a victim of bank deregulation, helped in the establishment of almost 400,000 new businesses. Its lending was based on the benefits it loans would produce, not necessarily the assets of the customer.
I think we need something like that again to help in the creation of numbers of new, viable businesses, benefiting the whole community. Such a bank would complement the existing banks rather than compete with them.
PW: Some critics of your proposal say that the Government should not be handing out taxpayer-funded, subsidised loans to certain sections of the community.
WB: The Government is already handing out very large taxpayer-funded, subsidised grants to certain sections of the community.
The Government is spending $4.5 billion this financial year on innovation, and through its Backing Australia’s Ability plan, will spend another $2.9 billion over five years supporting research and development.
These government projects involve substantial grants and tax concessions to industry. Instead, if some of this funding was provided by a development bank as loans to industry, then at least these funds would be repaid to the bank for further lending to new industries. The funds could effectively be recycled with greater benefit to the community at large.
A development bank could be started with a couple of hundred million in seed capital from the community via the government. The bank, with a government guarantee, could then raise funds in the markets at fine interest rates and from the Reserve Bank.
In this way, it could provide a lot of the money needed for industry development in place of subsidies which tend to benefit large and profitable businesses. This system is also less open to abuse.
PW: Is a development bank necessary when, it is claimed, we have record low interest rates in Australia?
WB: In the home mortgage market, competition has led to low interest rates. However, it could be argued that those producing jobs and wealth, that is farmers and small businesses, are paying a premium on their loans. It seems strange that we give preference to the acquisition of non-productive assets over those which produce ongoing economic activity. Also those in business incur substantial fees and charges. As a result, many are paying much higher effective interest rates than the advertised rate.
PW: Why couldn’t community banks fulfil the role of a development bank?
WB: Community banks provide basic savings, cheque and credit facilities via a franchise arrangement. They do not have their own substantial balance sheet; nor are they guaranteed by the Government. Therefore they do not have the capital base or access to secure the loan funds needed to on lend to provide long-term, low-interest loans to fund numbers of new enterprises.
They also have to satisfy the associated bank’s shareholders. That means they have to make a profit by charging the lender full commercial rates.
PW: Why is an inquiry needed into bank deregulation?
WB: The current deregulated financial system has provided benefits to the majority of people and organisations in Australia. However, disquiet does exist and criticism is extensive.
What we need is an unbiased community-based inquiry into the effects of deregulation – good and bad. Deregulation is now just on 16 years old, and a review is therefore timely. The terms of reference should be broad, but should specifically cover the need for a community-owned (government) development bank, the impact of deregulation on smaller communities and the level of services available to the less well off.
Political parties need to acknowledge that think-tanks, political advisers and party members may not constitute the best source of knowledge and wisdom on this subject. We need grassroots input from ordinary citizens as well as vested interests if we are to satisfy the community’s expectations of justice for shareholders, staff and customers as well as the development of this great country.