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Last week Prime Minister Malcolm Turnbull announced that there would be a Royal Commission into the banking sector. The shock move was forced on the government with rumours that Nationals MPs were prepared to cross the floor to push for the inquiry. Coincidently, in another about face, the chiefs of the big four banks also capitulated, sending an email to the Treasurer Scott Morrison Thursday asking for a Royal Commission, stating “it is now in the national interest for the political uncertainty to end.”

Read the letter here:

The banking industry has been plagued by scandal after scandal, but at the heart of the issue is the banking industry’s aggressive sales-drive culture which places emphasis on profits before customers, and the extraordinary profits the banks make. The Australian Competition and Consumer Commission (ACCC) is not confident of the level of competition in the sector. The head of the ACCC recently said the market is “characterised by oligopolies comprising the large banks, who can influence products, prices and other conditions in important markets either alone or together.”

The Turnbull Government had vehemently been opposing a Royal Commission citing it would undermine our strong banking sector and was “unnecessary”. However, when announcing the backflip, Treasurer Scott Morrison said, “the nature of political events means the national economic interest is now served by taking what I describe as a regrettable but necessary action”. The commission will run for 12 months and is estimated to cost $75 million. The inquiry will investigate the conduct of the banks, insurers, financial services providers, and superannuation funds.

Term of Reference

Since the announcement, the Labour party and other special interest groups have argued that terms of reference are too narrow. Shadow Treasurer Chris Bowen has stated it is essential to have bipartisan agreement on the terms of reference. In a letter to the Treasurer, Mr Bowen said, “if the Turnbull Government does not get this right from the start, we will only see a continuation of the financial scandals, lack of justice for victims of financial malfeasance and systemic risks that are contributing to the uncertainty for the financial services sector.” He further called for the Royal Commission to comprehensively investigate “the rorts and rip-offs,” including issues associated with the culture of banks and executive remuneration. Mr Bowen urged for consultation with banking victims’ groups to ensure that the victims can tell their stories.

What Does This Mean For Superannuation?

The intention of the inquiry is for strong banks with lower chance of failure. This is good for depositors but potentially bad for shareholders. Banks make up around one third of the Australian stock market and therefore most Australians’ superannuation is considerably invested in the major banks. A fall in bank share prices would be bad for the Australian stock market, superannuation, and the economy.

What Does This Mean For Interest Rates?

Interest rates could rise as a result of the Royal Commission. Australian Bankers’ Association chief executive Anna Bligh, whilst welcoming of the inquiry, warned that it could force up interest rates, stating the inquiry “runs the risk that Australia will be seen as a more risky investment by global investors that can go anywhere. The risk is that they don’t invest or suspend their investment in Australia or they put a premium on the price of those funds.”

An increase in interest rates could then have a knock-on effect of constraining house prices growth. The increased scrutiny the banks will be under to show responsible lending practices could lead to them limiting credit, smaller loans approved, reduced loan growth and in turn a temperance in house prices.

Ongoing speculation about a banking sector has been disruptive and undermining the reputation of Australia’s world-class financial system. The Royal Commission, if executed effectively with broad terms of reference to allow a comprehensive inquiry, should put an end to the deliberation and uncertainty. Australians have the right to be treated honestly and fairly by the banking sector. The broader effects of the Royal Commission will depend on how ‘bad’ or ‘good’ the financial sector has been. Only time will tell.

Who is Elliot Watson

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