Much has been made of the extraordinary backflip this week by the prime minister, Malcolm Turnbull, on the issue of a banking royal commission – from two weeks ago when he was telling Channel Nine’s Karl Stefanovic that a royal commission “doesn’t do anything other than write a report”, to this week announcing one.
But of course this isn’t really a banking royal commission – it is instead a royal commission whose own framers see little need for it. It has been given just one year – a year less than was given to the trade union royal commission – and with terms of reference that are poorly focused, and which you could be excused for believing are designed to produce little change to our financial system.
It is the weirdest announcement for a royal commission that I can recall.
First there was the extraordinary fact that Turnbull announced the royal commission the very day the banks – the ones supposedly being investigated – asked him to set one up and even rather helpfully provided some advice on the terms of reference.
And when announcing the commission, Turnbull barely gave any reason for doing so. Of course, were he to do so, he would be implicitly admitting that he was aware of concerns about the banking sector that were large and systemic enough to warrant a royal commission but that he had held off on calling for one.
So instead of outlining the concerns about the banking industry, he talked about its concerns.
He argued: “we have got to stop the banks and our financial services sector being used as a political football” and that “the chief executives and chairman of the big four banks have written to us, asking the government to step in, end the uncertainty and ensure an orderly process that addresses the concerns”.
What those concerns were was not stated – which is a bit odd given that is generally the point of a royal commission.
The treasurer, Scott Morrison, even described the royal commission as “regrettable” – not because of any alleged actions by the banking system but because “politics is doing damage to our banking and financial system”.
The two men could hardly have done more to express a hope that the royal commission would not actually find any wrongdoing. And given that the draft terms of reference explicitly state that “the Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight”, there seems to be little desire for any practical outcome either.
The terms of reference state that macro-prudential policy “is policy and regulation, including as to the structure, role and purpose of financial regulators, that is concerned with containing systemic risk, which can have widespread implications for the financial system as a whole, beyond simply the banking system”.
So we have a royal commission into the financial system that “may not make recommendations” into policy that can “have widespread implication for the financial system”.
Of course, as Katharine Murphy has noted, the only reason the prime minister announced this commission was because if he had not done so, enough National party MPs would have crossed the floor next week and voted for one – one that would probably not have had such a vague purpose in its terms of reference.
And it is already clear the government’s main desire out of this commission is for it to be as little as possible about the banks and instead all about the superannuation industry – specifically the industry super funds.
The third point in the terms of reference asks the commission to inquire into “the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members”. That is a direct shot at industry super funds and claims they are used to benefit unions.
Conservatives always have an issue with organisations set up by unions for the benefit of workers, that actually deliver those benefits. And industry super funds have consistently delivered results – annoyingly better results than retail super funds.
The latest figures from the Australian Prudential Regulation Authority (Apra) show that the five-year annualised rate of return for retail funds is 7.5% compared with 9.8% for industry funds.
Perhaps the commission could ask why that is the case.
The banks have begun to agitate that the commission willprobably result in higher interest rates. This is something Martin Farrer noted as a possible outcome, should the commission suggest tighter lending standards. While that would probably cross the line into “macroprudential policy” territory, it might not be much of a concern.
The Australian Banking Association also suggests the commission will lead to higher interest rates because reputational risk might cause foreign lenders to charge more for Australian banks to borrow money from them.
It’s always been a bit of an odd argument that we shouldn’t have a royal commission into the banking sector because it might make investors question the reputation of our financial system.
As it is, the worry about high interest remains beholden to much more mundane economic and financial tangibles – such as rising US interest rates and the improving performance of our own economy.
This week, the latest private capital expenditure figures were released, showing that for the first time since 2012, new private investment was greater than in the preceding year. While mining investment continues to fall (albeit by smaller amounts), the non-mining sector is more than making up for the slack.
It means the end of the mining boom is now having little overall impact on the economy.
This is good news before next week’s release of the September quarter GDP figures.
As the royal commission is designed to be a political fix, it will probably have only a small impact on the economy. One handy outcome for banks and the government will be that they can blame it if higher interest rates occur.
The market still sees little sign of another rate rise for at least a year, and the reality is the government would like interest rates to go up, because for that to happen the economy would have to be humming along nicely.