|Commonwealth Bank of Australia chief executive Ian Narev|
When Euromoney interviewed Commonwealth Bank of Australia (CBA) chief executive Ian Narev in Sydney in July, he had this to say about the idea of a royal commission into banking conduct.
“Why do you want it?” he asked. “You want it because you believe there needs to be more scrutiny of the industry. But just look at what has happened in the last three, four years.”
He had by that stage already appeared twice before parliament as part of a review into Australian banking, and had publicly apologized for misconduct, as had the other big four CEOs.
“I can’t see what can possibly be gained from using more money and taking more time when the industry’s already shown a demonstrable commitment to take steps to do better,” he added.
It seemed that prime minister Malcolm Turnbull, an ex-Goldman Sachs banker himself, felt the same way, but by November it became clear that proponents of a royal commission had the numbers to get their way in parliament. And so Turnbull relented, albeit limiting its reporting deadline to a year and promising that it would not be “capitalism on trial”.
What does this mean for the banks?
With CBA still reeling from a money-laundering scandal to follow a previous life-insurance scandal and a financial-advice scandal; with Westpac in court for allegedly trying to rig interest rates; with the entire industry apparently loathed by the population it serves, it seems hard to believe that the reputation of Australia’s banks can get much worse.
But it will. The first thing that will happen is that victims of bad advice will line up to testify, their stories will get out and there will be considerable reputational damage once again.
The terms of reference of the commission don’t appear to be about financial stability or resilience – the feeling is, that has been done – but into “the effectiveness and ability of regulators of a financial services entity to identify and address misconduct”.
It also has the scope to recommend changes to financial regulation to address misconduct.
They’re quite aware of the public mood and they’re just going to have to grin and bear it
In some ways it won’t tell us anything we don’t already know. CBA, whose stock has been hit hardest by news of the commission, is already subject to an investigation by the Australian Prudential Regulation Authority – one of the smartest bank regulators in the world – into its culture.
There is a productivity commission already under way which might have a bigger impact on the banks if it argues for the forced divestment of wealth-management arms. And there have been numerous inquiries during the past 10 years and they have never yet concluded anything systemically significant for Australian banks.
But there certainly could be impacts. It appears likely that remuneration will also be part of the commission. It is possible that executive bonuses could be linked more specifically to benchmarks such as customer satisfaction, or banking practices that benefit society – or at least don’t actively torpedo it.
It has also been argued that while the commission is under way – which should take about a year – banks are less likely to raise lending rates unless Reserve Bank of Australia rises make it more obviously justifiable. If yields globally are going up, that has an impact on cost of funding.
There will naturally be a financial cost of the inquiry; Citi says it will be about A$1.125 billion for the seven banks it covers; UBS says A$50 million to A$100 million per bank. Citi says the distraction to senior management will mean leading banks might review or delay business plans.
But it could have been worse. The commission many envisaged would have gone on for years with vast amounts of testimony and would have had a broader scope. If nothing else, the banks will find the limited timeframe palatable, even as they fear what will come out of it all.
They’re quite aware of the public mood and they’re just going to have to grin and bear it.