Submission for the Banking System Reform (Separation of Banks) Bill 2019 - Parliament of Australia
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Banking System Reform (Separation of Banks) Bill 2019
Submission 29
Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600
Submission for the Banking System Reform
(Separation of Banks) Bill 2019
Members of Senate Economics Legislation Committee,
I am pleased to have the opportunity to make a submission to the committee.
I have been an avid student of economics since high school in the 1960s. I studied economics at
university and learned that the operations of the banking system were not included in the
economics curriculum. I was puzzled by this and have continued to be curious about how the
banking system works. Throughout my adult life and teaching career, I have maintained a keen
interest in economic theory and banking.
The Quantitative Easing strategy employed by central banks to tackle the Global Financial Crisis
(GFC) of 2007 demonstrated empirically that the banking sector was creating the money supply.
This was a revelation for me because, like most people, I had been taught that banks are
“intermediators” that accumulate funds in the form of deposits and then lend these funds for a
moderate profit.
Professor Richard Werner in his book, New Paradigm in Macroeconomics, demonstrates
conclusively that banks create the money supply. This has been confirmed by the Bank of Englandi
which now acknowledges that banks create new money when they issue a loan.
This is an important factor in considering the relationship between private banks and the nation.
This ability to create the money supply assigns to banks enormous power – power that, I believe,
rightly and constitutionally belongs with the national government on behalf of the nation.
I have prepared my submission because I am deeply concerned for the future stability of
Australia’s banking system and its diminishing role as a force for good in Australian society.
These concerns inform the arguments I present in this submission.
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Summary of my submission
The Separation of Banks Bill 2019 is vitally important legislation that has the potential to affect
every Australian who has a bank account. It is a bill that will not only separate commercial banking
from investment banking, but it will also protect customers’ deposits from speculative financial
activities and, importantly, re-establish Australian control over Australian banks.
The purpose of The Separation of Banks Bill 2019 is twofold:
1. To re-establish confidence in the banking system
2. To separate retail commercial banking activities from risky non-banking activities
I will address each of these purposes in turn but, before I do, I will outline my understanding of
how control of Australia’s national banking system has been taken over by international banking.
The sell-out of Australia’s Public Banking System
Australia’s banking system has a relatively short history.
During the first hundred years, Australia’s banks were established as private corporations, the next
hundred years saw the development of a remarkable public institution: The Commonwealth Bank
of Australia (CBA) and the last fifty years have seen the subversion of the Commonwealth Bank of
Australia as a public entity working for the benefit for all Australians and its conversion to an
emasculated, private corporation working solely for the benefit of its private shareholders and its
managing directors.
This sell-out by parliamentarians (of all parliamentary parties) has occurred firstly, because
parliamentarians are generally not well-educated in the machinations of the banking system and
secondly, because they are beholden to the banking industry for donations, advice, legislation and,
when they leave their parliamentary careers, for lucrative employment in many cases.
The history of Australia’s Banks
In the early days of settlement, there were no formal banks in NSW and money consisted of
whatever the early convicts, settlers and government could improvise, including foreign coins,
personal promissory notes, bills of exchange on the British Treasury and, notoriously, rum. When
Governor Lachlan Macquarie established the Bank of NSW in 1816, he was doing so against the
express instruction from the Colonial Office order that he was not to set up a bank. Regardless, the
Bank of NSW was necessary, it was established, and it thrived. Other banks were established as
private companies which could issue their own credit in the form of banknotes.
Until 1848 every colonial bank was a joint-stock company with unlimited liability. These banks
issued their own bank-notes and they competed with other commercial (non-bank) enterprises
which also issued their own credit notes. By 1851, banks in Australia were organized on the British
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model of limited liability companies and our commerce operated in a monetary system faithful to
the British pattern.ii The Bank of Australasia and the Union Bank of Australia had been chartered
in Britain and operated as branches in Australia introducing a direct connection to the City of
London banking centre.
Australia’s early banks were susceptible to loss of confidence, embezzlement, fraud, drought and
flood and bank failures were not uncommon in the period 1840 – 1890. The worst banking crisis
and depression in Australia occurred in 1893 as a consequence of the property boom during the
1880s. Of the 64 deposit-taking institutions (banks) operating in 1891, 54 had closed by mid-
1893.iii
Two very significant consequences of the 1890s depression wereiv:
1. the Federal Government took over note issue in 1910 and based it on a gold reserve
system
2. in 1911, the Federal Government created the Commonwealth Bank of Australia
The Commonwealth Bank was a public national bank which acted as a clearing house for inter-
bank exchanges as well as a guarantor for all bank deposits. In 1945, the Commonwealth Bank Act
formally established the Commonwealth Bank as sole legal issuer of Australian banknotes.
As our national public bank, the original Commonwealth Bank served Australians very well. It
provided a national system of bank branches and agents via post offices. It provided foreign
exchange facilities for international trade. During World War I, organised war loans, primary
production pools and a merchant shipping fleet. During WWII, it provided finance to conduct the
war and, post victory, provided finance for housing construction and industrial development. The
bank’s Migrant Information Service assisted war refugees and migrants to come and settle in
Australia.
However, the private banks always resented the CBA and regarded the publicly-owned bank as
unfair competitionv. As soon as Denison Miller, the Governor of the CBA, died, the private bankers
began their takeover of the bank by promoting the Commonwealth Bank (amendment) Act 1924
which replaced the position of Governor with a Board of Directors largely comprised of private
bankers.
As commented by CBA Historian, DJ Amos:
From the date of the appointment of this Directorate, the Commonwealth Bank,
as a people's bank, ceases to function; it becomes a bankers' bank, an appanage
and convenience of the private banks, run for their special benefit.vi
And in 1959, the Commonwealth Bank was dismantled. The central banking functions were
transferred to the Reserve Bank of Australia. The trading/savings bank functions became the
Commonwealth Banking Corporation (CBC).
In spite of promises to retain the CBC in public ownership, the Labor Party began to sell-off the
CBC through The Commonwealth Banks Restructuring Act of 1990.
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The creation of the Reserve Bank of Australia (RBA) in 1960 as our “independent” central bank,
removed the CBC’s role in regulating Australia’s banks. This step prepared the way for eventual
privatisation of the CBC and other State banks; indeed, the whole of Australia’s banking, credit-
creation and regulatory systems.
Today, revolving directorships between the banks, Treasury and regulators APRA and ASIC keeps
economic policy “in-house” among the private bankersvii.
In fact, world-wide, central banks have been progressively de-coupled from representative
democratic institutions. The Bank of England is independent of the British Parliamentviii, the US
Federal Reserve is independent of the US Congressix and the Reserve Bank of Australia is
independent of the Australian Parliament.x
However, this is, apparently not sufficient for the International Monetary Fund (IMF) which is
agitating for complete removal of government oversightxi in relation to the new bail-in powers
passed by the Senate in February 2018.
Bail-in powers in Australia
In its Feb 2019 report Financial System Stability Assessment of Australiaxii, the IMF demands three
changes to APRA:
1. A clarification of APRA’s responsibilities, which currently are stated as “the protection of
the depositors” of the banks and “the promotion of financial system stability in Australia”,
to reflect the fact that “financial stability” is the primary objective, ahead of depositor
protection;
2. An end to the Treasurer being able to direct APRA, and to the current requirement that
APRA obtain the consent of the Treasurer to implement certain measures in a bail-in
“resolution”;
3. An end to Parliament being able to disallow an APRA prudential standard, a democratic
safeguard which the IMF insist “weakens” APRA in terms of its ability to enforce measures
(such as bail-in) to achieve financial stability.
It needs to be pointed out that “financial stability” and “security of bank customers’ deposits” are
not the same thing and that the emphasis is bank resolution (ie saving a bank) at the cost to
depositors of the loss of their money. This was demonstrated in the Cypress bail-in of 2013 which
set the template to be used globally.xiii
Under Australia’s Banking Act 1959, depositors were granted a priority claim (‘depositor
preference’) on the assets of a failed ADI ahead of other unsecured creditors. However, the
precedence of creditors has been reversed for banks. The following passage explains how:
“In principle, depositors are the most senior creditors in a bank. However, that was
changed in the 2005 bankruptcy law, which made derivatives liabilities most
senior. In other words, derivatives liabilities get paid before all other creditors --
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certainly before non-crony creditors like depositors. Considering the extreme levels
of derivatives liabilities that many large banks have, and the opportunity to stuff
any bank with derivatives liabilities in the last moment, other creditors could easily
find there is nothing left for them at all.”xiv
Over the course of the past forty years, our parliamentary representatives have sold-out
Australia’s independent banking system to private banking interests. The Australian parliament
has progressively transferred control of our banking system to the international, supra-national,
private banking syndicate. The City of London (which hosts the financial centre), the Bank for
International Settlements (BIS) and tax haven islandsxv are all “independent states” beyond the
control of any government.
The Senate has the opportunity with the Banking System Reform Bill to re-assert Australia’s
sovereignty over Australia’s banking system to rescue it from control by this international, private
banking organisation.
Despite banks in Australia having been granted the special privilege to create the money supply by
issuing credit in the form of loans, their behaviour demonstrates that the banks do not consider
the general welfare of society in their activities. For example, the relatively recent “innovation” of
hybrid bonds (aka Contingent Convertible or “CoCo” bonds) have been sold to superannuation
funds and other unsuspecting investors. Hybrid securities are too complex to be properly
understood, too varied and too much like equity to be considered bonds. They have been
described as “a high-yield investment with a hand grenade attached”.xvi
Time and again, during the recent Royal Commission, the banks were shown to put profit above all
other considerations. They were even prepared to engage in base unethical,
behaviour for profit. Yet what was the outcome of the Royal Commission? Another long report
that documented a litany of unethical activities and little in terms of accountability.
No one prosecuted. No one imprisoned. Some fines to be paid from bank revenue. And, not
surprisingly (because it was excluded from the Terms of Reference) the Hayne Report did not
address the most basic issue – the vertically integrated structure of the banking and finance
industry.
It is little wonder that the ordinary citizen despairs of any real action to rein in the banks?
Is the Senate going to allow this “business as usual” approach to continue or will the Senate do its
job and legislate for the common good; for what used to be termed the “common-wealth” of
Australians?
I will now address the first purpose of The Separation of Banks Bill 2019.
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Re-establishing confidence in the banking system
The continued viability of a bank depends on the confidence of its depositors. This is because
banks only hold a small fraction of the funds vested by their depositors. Should the depositors lose
confidence in their bank and withdraw their deposits, the bank will soon not be able to meet the
demand for funds and the bank will become insolvent and that bank would collapse.
However, in the case of a retail, commercial bank lending for productive purposes such as housing,
businesses and farms, the underlying security is real physical wealth in the form of land, buildings
and equipment. A run on a retail bank creates a liquidity crisis: the bank’s assets cannot be
converted to cash fast enough to meet the demand from customers to pay back their deposits.
During the Great Depression in Australia, the Commonwealth Bank stemmed a series of bank runs
on private banks by declaring that it would guarantee all deposits. The Federal Deposit Insurance
Corporation (FDIC) was set up in the US for the same purpose and was similarly successful in
preventing bank runs.
Prior to deregulation in the 1980s, the Commonwealth Bank of Australia, when it was a public
institution, worked for the benefit of all Australians.
Examples of its community-minded ethical behaviour included:
Forcing the private banks to compete with each other instead of colluding.
This drove down interest rates and fees
Preventing a panicked run on the private banks, by guaranteeing their deposits
Financing Australia’s most important export at the time - the national wool clip
Supporting major infrastructure development such as the Trans Australian Railway
Providing the funding necessary to resource our armed forces in WW1 and WW2.
As a consequence of the focus on the welfare of the Australian people and an apparent allegiance
to Australia rather than London banks, the Australian people had great confidence in Australia’s
banks and generally held bankers in high esteem.
The problem of Derivatives
However, deregulation has undone this very successful strategy for maintaining confidence in our
banking system. By expanding into risky financial services, the banks have taken on exponentially
more risk in the pursuit of profit. Bank assets now are no longer real physical assets – they are
contracts. The Australian people no longer feel that the banks, are working for them.
One of the most troubling effects of deregulation has been the explosion in derivatives contracts
and the consequent exponential risk taken on by the big four banks.
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Derivatives derive their value from an underlying entity such as an asset, index or interest rate and
so do not have any solid asset backing. Derivative contracts form a network of contracts and
counterparties. The nominal value of a contract may be known but not the value of other
contracts that may be linked into the network at two or three or four degrees of separation. There
is no way of knowing the effect a chain reaction of derivative claims may engender. This is why
investor Warren Buffet has described derivatives as “financial weapons of mass destruction”xvii.
According to the president of WorldMoneyWatch.com, Kimberly Amadeo, the proliferation of
unregulated derivatives was the real cause of the 2008 financial crisis.
Kimberly explainsxviii:
As demand for housing fell so did home prices. The mortgagees found they couldn't
make the payments or sell the house, so they defaulted affecting the value of the
mortgage-backed security (MBS) class of derivative product.
Although some parts of the MBS were worthless, no one could figure out which
parts. Since no one really understood what was in the MBS, no one knew what the
true value of the MBS actually was. This uncertainty led to a shut-down of the
secondary market. Banks and hedge funds had lots of derivatives that were both
declining in value and that they couldn't sell.
Soon, banks stopped lending to each other altogether. They were afraid of
receiving more defaulting derivatives as collateral. When this happened, they
started hoarding cash to pay for their day-to-day operations.
Derivatives have radically changed the nature of banking in Australia and around the world. They
have created the potential for financial melt-down and have compromised the viability of deposit
guarantees.
At the end of 2018, the notional value of outstanding derivatives positions among Australia’s big
four banks was around $AUD 36 trillionxix. In 2018 Australia’s Gross Domestic Product was only
$AUD 1.38 trillionxx.
In an economic crisis such as the GFC, where the collateral damage of a crash is unpredictable, a
derivatives exposure that is over twenty-five times the value of all products and services produced
in one year in Australia is too much risk.
With Australia’s vertically-integrated banks, retail customers’ deposits are the likely collateral
damage of the bank’s derivatives exposure. This is patently unfair. Bank customers place their
savings in a retail bank for security. They receive miniscule reward because interest paid is
miniscule and they gain no benefit from the bank’s gambling with derivatives, yet the bank is using
their deposits to underpin their derivative trading.
As reported by Martin North of Digital Finance Analyticsxxi:
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“$37 trillion is a good representation of the current gross (derivatives) exposures
in our banking system, and this dwarfs the banks’ current balance sheets, and the
country’s total economy.
“The risks are literally enormous, and in a system-wide banking crash, when
multiple parties are exposed, a bail-out, if required, would likely have profound
economic effects. It might be enough to swamp the entire economy.
That’s how big the potential risks are. That’s why Glass-Steagall is worth
pursuing.”
If financial entities wish to gamble in the derivatives sphere, that is their prerogative. However,
such risky gambling should NOT be underwritten by customers’ deposits, government bail-outs or
the bail-in of depositors’ funds.
There is a simple solution to this problem: separate retail commercial banking from risky financial
speculation.
Despite the banking fraternity’s penchant for gobbledygook jargon and lawyer-like expressions to
cloak the business of banking as some sort of enigmatic wizardry, retail banking is not a complex
undertaking. Essentially, it involves building a base of liquid funds from deposits and then issuing
loans which are underpinned by collateral of some real asset.
According to Professor Richard Wernerxxii who made his career in the study of banking, small
community banks are most successful because the community itself exerts significant moral
suasion on the management of the bank.
A genuine government guarantee of deposits takes the risk out of depositing. It is a crucial
component for sustaining confidence in a bank. There is really little risk to the government in
giving a guarantee of deposits, because the bank’s loans are underwritten by the collateral of real
assets. There is little risk that the loan will not be repaid, or the underlying asset cannot be sold.
Commercial banking really carries little risk and, consequently, returns only modest profits.
To restore and sustain confidence in the banking system, the unconscionable risk posed by
derivative trading must be addressed.
And so, I move to the second purpose of The Separation of Banks Bill 2019:
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Separate retail commercial banking activities from risky non-
banking activities
Following the escalating banking collapses that coincided with the Great Depression, President
Franklin Roosevelt’s congress passed the 1933 Banking Act which included four provisions
commonly referred to as Glass-Steagall after its congressional sponsors. Glass-Steagall resolved
the banking crisis by separating necessary commercial banking from the non-core investment
activities that had caused the failure of 4000 banks in the US during the period of the Great
Depression.
The Glass-Steagall Act was supported because the chief counsel to the U.S. Senate Committee on
Banking and Currency, Ferdinand Pecora, uncovered behaviour not dissimilar to the misconduct
revealed by our own Hayne Royal Commission. The uncompromisingly brave and persistent Pecora
revealed to the public the base greed and corruption that had been hidden behind the façade of
respectability which the banks cultivated through favours to politicians and paid propaganda.
Pecora’s revelations roused the public to support the President’s action in calling out the banks’
unconscionable behaviour and, with the pressure of public opprobrium towards the banks, Glass-
Steagall was able to pass both houses of Congress.
The Glass-Steagall Act separated retail banking from investment banking and, thereby prohibited
banks from using depositors’ money to pursue high-risk investments. The success of the law
encouraged its emulation in advanced economies including our own.
This Senate Committee in 2019 is in much the same position as Pecora was in 1933. We know that
banking crimes have gone unpunishedxxiii
a structural change to the system is neededxxiv
large political donations have bought influence and advocacy for the banksxxv
a “revolving door” of directorships blurs the relationship between banks and regulatorsxxvi
an economic crisis is looming because of escalating debtxxvii
The Glass-Steagall law ushered in 66 years of banking stability in the US and Australia and other
countries which adopted the principle of the separation of commercial and investment banking.
However, in the 1960s and 1970s bankers lobbied for the repeal of Glass-Steagall complaining that
heavily regulated commercial banking was losing market share in finance to the less regulated
institutions and markets of Wall Street. Glass-Steagall was repealed in 1999.
It is not surprising that the GFC followed just seven years after the repeal of the Glass-Steagall law
allowed banks to expand their operations from the core business of retail and commercial banking
to all manner of financial products including financial derivative products (which were illegal in the
US before 2000). In pursuing growth, the 1980s witnessed a frenzy of bank acquisitions and
mergers as the main players competed for dominance in the financial marketplace.
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This “survival of the fittest” behaviour has led to the development of “Too Big To Fail” (TBTF)
banks, also known today as Global Systemically Important Financial Institutions (G-SIFIs). It is no
surprise that the BIS has changed the name from TBTF to G-SIFI because the very name “Too Big
To Fail” implies the need to reduce the size so that being “too big” ceases to be the issue.
However, the BIS has sought instead to have non-bank entities (including bank customers)
shoulder the cost of the failure of a TBTF bank.
The Glass-Steagall model for prudent banking was wound back and eventually removed altogether
during the heyday of the neo-liberal economic theories promoted during the 1970s and 1980s and
realised during the 1980s and 1990s as “financial de-regulation”.
To restore the confidence of bank depositors, we need to separate commercial banking from
investment banking.
Too Big To Fail banks
Although Australia’s four major banks are not regarded as systemically important at the global
level, they are Domestic Systemically Important Banks (D-SIBs) and could, were they to succumb
to financial stress, have an important impact on the domestic financial system and economy.xxviii
The four major banks are heavily invested in housing mortgages (about 60% of their loans) and
house prices are now falling. Australians have a debt-to-income ratio of 190 per centxxix so it is not
unreasonable to expect that mortgage defaults are going to increase in the future.
As reported by Martin North of Digital Finance Analytics:
“Loans originated in more recent years, at the peak of the property boom, will be
more exposed to property price declines, particularly those with higher loan-to-
value (LTV) ratios.”xxx
North observes that there are strong parallels between the current situation in Australia and the
situation in Ireland prior to the Irish property crash of 2009.
Who controls our banks?
Since financial de-regulation in the 1980s and 1990s all Australian banks have come under the
control of the Bank for International Settlement (BIS) in Switzerland – a supranational organisation
beyond the jurisdiction of Switzerland or indeed any other national or international governmental
jurisdiction
It is interesting to note that in the reconstruction of the banking system following WWII, the
Roosevelt administration had intended to subjugate national central banks to the state - as was
done under the American System. However, the international monetary system that has
developed is the polar opposite. This is because British and European central bankers operating in
cahoots were able to exercise considerable and decisive influence over post-WWII joint policies. xxxi
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The power of the international banking lobby to control banking at the domestic level is evident in
the eradication of any genuinely national banking system during the course of the past decades.
Today, virtually all banking is operated according to the pronouncements of the BIS and the IMF.
Australia’s banks are subservient to the BIS and IMF and the Commonwealth Government is
habituated to following legislation prepared by the banks on behalf of the BIS. This is clearly
evident in the passage of the Financial Sector Legislation Amendment (Crisis Resolution Powers
and Other Measures) Bill 2017 which passed through the parliament with hardly any critical
debate and without an audible vote taken in the Senate for the adoption of the bill.
The lack of appreciation by Senators of the significance of this bill for the introduction of the BIS
“bail-in” strategy for resolving distressed banks clearly demonstrated the power of the banking
lobby to suppress consideration of the welfare of Australian citizens for the benefit of the banking
system.
The wording of the bill is technically dense, the logical structure is convoluted and the
explanations obscure. It was a bill written to obfuscate and confuse, not elucidate and clarify for
the legislators so they understood what they were dealing with. It is telling that not one of the few
senators present for the final reading of the bill, audibly voted for its adoption – surely an
indication that they were NOT committed to its passage into law.
The consequence of deregulation has been the commodification of everything from education to
healthcare, an explosion of “user pays” services, rampant growth of all manner of gambling and
the exponential growth of derivative financial products.
The world has become mired in unpayable debt, economic rationalism has seen whole industries
shut down or relocated off-shore and the current generation of graduates are facing a lifetime of
HECS debt, low wages, little prospect of continuous employment and house prices beyond the
reach of most.
Senators, we must prepare for another economic collapse because there has been no structural
change to the way the banking system operates following the GFC – only desperate “resolution”
procedures to save the system at the expense of the customers and the investors in the event of
the next financial crisis.
GFC causes have not been resolved
There has been no resolution of the Global Financial Crisis. This is evident from many measures of
financial well-being. Australia’s debt levels are escalating, we are currently experiencing the rapid
deflation of the housing bubble, Globally Australia has either the highest, or near highest, levels of
household debt across most measures.xxxii
The banking system is preparing for the day when some new shock that causes the collapse of a
global systemically important bank (G-SIB) but their response is to bypass representative
government and institute a “bail-in” regime that will convert investors’ bonds and customers’
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deposits into bank shares; ostensibly to avoid the need for a politically unacceptable bail-out as
occurred during the GFC.
The bail-in of bank customers’ deposits is the standard in the UK, EU, USA and New Zealand.
Despite the contradictions of APRA, Treasury and the Treasurer and Prime Minister, Australia has
also passed bail-in legislation that provides for the conversion of customers’ deposits if a bank
becomes insolvent.
The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill
2017 (aka the “Bail-in Bill”) passed by the Senate in February 2018 does not exclude deposits (aka
unsecured loans to the bank) from conversion to bank shares in the event of bank insolvency.
Of particular concern is the recent report that the IMF’s Financial Sector Assessment of Australia
stated that the resolution framework (bail-in) in new APRA emergency powers "has not been fully
completed" and needs to be finalised. The same report also calls for the independence of APRA
from parliamentary oversight. In other words, the banking “regulator” should be above the
government of the nation.
The arrogance of this stance is stupefying; that our legislators would accede to such demands is
unthinkable.
Bail-in includes deposits
From my reading of recent analysis of the bail-in situation in Australia, it seems that in the event of
a bank becoming insolvent in Australia, customer deposits are subject to bail-in – as indeed they
are in other major economies.
As I understand, in Australia, when a bank becomes distressed:
1. Holders of derivative products will be paid out in full
2. Holders of shares in the bank will see the selling price of their shares fall
3. Those who hold hybrid bonds will be bailed in (ie the bonds will be cancelled)
4. Deposits (in full or in part) will be converted to bank shares
5. If the bank survives shares may be sold to recoup some value
6. If the bank fails Deposit guarantee (if activated) applies to any remaining deposits
This is a very different scenario to what most people believe is the guarantee of their money in the
bank. We saw the bail-in policy template in action in Cyprus in 2013 when the Bank of Cyprus
converted 37.5% of deposits exceeding €100,000 into "class A" shares, with an additional 22.5%
held as a buffer for possible conversion in the future and another 30% were held as frozen
deposits.xxxiii
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There is an heroic sophistry in the banking systems’ rationale for bail-in as demonstrated in the
following quote:
“One of the key lessons from the crisis for governments has been the need to
introduce new bank resolution regimes that shift the burden of failing banks from
the taxpayer to investors. The ‘bail-in’ mechanism aims to ensure that banks’
shareholders and creditors – including uninsured depositors – pay their share of
costs.”xxxiv
There are at least two fallacies in the logic of such statements. The first is that the solution to a
failing TBTF bank is to save the bank. No; the solution is to remove the cause of the failure: the
size of the bank and the size of the gamble.
The second is to assert that depositors should share the cost. Depositors put their money in banks
because banks are designed to keep money safe. Depositors do not share in the profits of banks
and deserve no liability for the failure of a bank that gambles with the depositors’ funds.
The government has denied that deposits are subject to bail-in yet when Pauline Hanson of One
Nation proposed an amendment to explicitly exclude deposits from bail-in, the government
manoeuvred to bring on the vote on the Financial Sector Legislation Amendment (Crisis Resolution
Powers and Other Measures) Bill 2017 while Ms Hanson was absent from the Senate.
Investment banking can return enormous profit, but this comes from the enormous risks generally
inherent in gambling activities. Customers who deposit funds in a bank should not be liable for the
risks taken on speculative investment activities and investment bankers should not be able to
gamble customers’ deposits on speculative activities.
In a free market economy, investment banking should be able to operate and cater to clients who
want such a service and are prepared to shoulder the inherent risks. But it must do so without
access to depositors’ money and without government or depositor support, should the institution
begin to fail.
Faux bank separation
Of course, bankers will object to the loss of customer deposits and will raise all manner of specious
arguments in favour of retaining the status quo with modifications such as “ring-fencing”.
Ring-fences were built to keep farm animals in and predators out. However, in the world of
banking, ring fences keep the farm animals locked in with the predators!
The British ring-fencing law which went into effect at the start of in 2019xxxv requires financial
institutions to segregate their consumer banking activities ostensibly to protect customer bank
deposits from potential investment banking losses. UK banks were required to recreate their
banking arms as separate entities, each with its own board.
A Allison P a g e | 13Banking System Reform (Separation of Banks) Bill 2019
Submission 29
Banking System Reform (Separation of Banks) Bill 2019
However, as was clearly the case with Glass-Steagall, it is the practice of the banks to whittle down
such restrictions over time until there appears to no longer be justification and they then pressure
legislators to repeal the law. Ring-fencing is NOT separation and must not be accepted as a
solution.
It is shameful that the Australian Senate allowed the “Bail-in Bill of Feb 2017 to pass without due
diligence particularly in the face of so much public opposition to the bill. Senators are again in the
position of having the opportunity to study the wording of the bill closely and to educate
yourselves about the state of the banking system and the precarious state of the world economy
before making a decision.
Australia must return to the prudent banking practices of maintaining complete separation of
commercial banking from investment banking and providing a genuine guarantee of deposits.
Bank separation rationalises risks and rewards and places the risks where they logically belong.
Such structural separation will renew public confidence in the banking sector. Deposits will be free
of risk over which depositors have no control and speculators will be free to take their own risks
pursuing the profits which they seek.
Senators, I exhort you to act in the best interests of the Australian people and vote in favour of the
Banking System Reform (Separation of Banks) Bill 2019.
Thank you for considering my submission.
Anthony Allison
Monday, 8 April 2019
A Allison P a g e | 14Banking System Reform (Separation of Banks) Bill 2019
Submission 29
Banking System Reform (Separation of Banks) Bill 2019
References
i
https://www.bankofengland.co.uk/knowledgebank/how-is-money-created
ii
http://setis.library.usyd.edu.au/ozlit/pdf/sup0003.pdf
iii
https://www.rba.gov.au/publications/rdp/2001/2001-07/1890s-depression.html
iv
https://www.rba.gov.au/publications/rdp/2001/2001-07/proposals-for-government-note-issue-and-the-
development-of-a-central-bank.html#r44
v
https://alor.org/Library/Amos%20DJ%20-%20Commonwealth%20Bank.pdf
vi
https://alor.org/Library/Amos%20DJ%20-%20Commonwealth%20Bank.pdf
vii
https://www.smh.com.au/business/revolving-regulators-how-one-door-opens-another-in-australias-financial-
system-20150527-ghb6n4.html
viii
https://www.bankofengland.co.uk/about/governance-and-funding
ix
https://en.wikipedia.org/wiki/Federal Reserve
x
https://www.rba.gov.au/about-rba/our-role.html
xi
https://www.imf.org/en/Publications/CR/Issues/2019/02/13/Australia-Financial-System-Stability-Assessment-46611
xii
https://www.imf.org/en/Publications/CR/Issues/2019/02/13/Australia-Financial-System-Stability-Assessment-46611
xiii
https://www.forbes.com/sites/nathanlewis/2013/05/03/the-cyprus-bank-bail-in-is-another-crony-bankster-
scam/#379b2a652685
xiv
https://www.counterpunch.org/2015/12/30/bail-ins-begin-a-crisis-worse-than-isis/
xv
See Treasure Islands by Nicholas Shaxton
xvi
https://www.bloomberg.com/quicktake/contingent-convertible-bonds
xvii
https://acquirersmultiple.com/2017/02/warren-buffett-derivatives-are-financial-weapons-of-mass-destruction/
xviii
https://www.thebalance.com/role-of-derivatives-in-creating-mortgage-crisis-3970477
xix
https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/otc-
deriviatives/reports/201210-otc-der-mkt-rep-au/australian-otc-derivatives-market-activity.html
xx
https://countryeconomy.com/gdp/australia
xxi
https://www.macrobusiness.com.au/2018/06/australia-sitting-ticking-derivatives-nuclear-bomb/
xxii
https://www.aph.gov.au/DocumentStore.ashx?id=2175cccc-9832-4fb6-8724-f8e428345a9b&subId=562716
xxiii
https://nuggetsnews.com.au/greed-of-australian-banks-exposed-in-royal-commission-report/
xxiv
https://www.afr.com/business/banking-and-finance/banks-vertical-integration-experiment-was-an-ultimate-
failure-steve-bracks-20181119-h181z8
xxv
https://thenewdaily.com.au/news/national/2017/02/28/where-are-they-now/
xxvi
https://thenewdaily.com.au/news/national/2017/02/28/where-are-they-now/
xxvii
https://www.news.com.au/finance/economy/australian-economy/six-path-ways-to-australias-economic-
armageddon/news-story/5f11849237d1621569e85a9f2c2a1948
xxviii
https://www.apra.gov.au/sites/default/files/information-paper-domestic-systemically-important-banks-in-
australia-december-2013.pdf
xxix
https://www.nestegg.com.au/property/12343-why-the-rba-is-worried-about-mortgages
xxx
http://digitalfinanceanalytics.com/blog/rmbs-risks-rising-fast-as-house-prices-fall/
xxxi
http://aei.pitt.edu/2812/1/079.pdf
xxxii
https://www.abc.net.au/news/2018-10-30/australia-most-country-to-risks-of-rising-household-debt/10445814
xxxiii
https://www.usatoday.com/story/money/business/2013/07/29/bank-of-cyprus-depositors-lose-savings/2595837/
xxxiv
https://voxeu.org/article/bank-bail-ins-lessons-cypriot-crisis
xxxv
https://www.investopedia.com/terms/r/ringfence.asp
A Allison P a g e | 15You can also read
