I love cars. I love reading about them, I used to tinker with them and I love how far they’ve advanced in my lifetime. For all the talk of advancement in cars with an internal combustion engine, the biggest advancement in the last 40 years has been to pretend that the engine is not there. The Noise Vibration and Harshness (or NVH) of cars has been improved through a mix of sound deadening, improved suspension and improved aerodynamics. But these are what you don’t see.
When you raise the hood of many cars today you’re looking at a plastic cover that makes the engine bay look neat and tidy. Again pretending that the engine isn’t there. It’s what you don’t see.
I wish I could say that the financial system had also advanced as much in that same era. Oh, it looked promising for a while. Keating had introduced 16 new banks, many jobs were created and it looked like the locals were finally facing some competition.
Some foreign banks – and I’m looking at the American and British banks now – tried to take the locals head-on in the retail banking space. This was folly because the locals had developed a branch network over a century or more of operating (the internet was not yet used in Australia). So they failed.
The only area where foreign banks took on the locals with a modicum of success was in the corporate and institutional space. The foreign players also introduced investment banking to Australia on a large scale. This further introduced innovative products such as securitization and hedging instruments (like interest rate and currency swaps). Again, what you don’t see.
The GFC changed that. Many foreign banks couldn’t retreat fast enough (lead in their retreat – as ever – by the French). This meant a massive funding gap had to be filled. The local banks could pick and choose who their clients were and the liquidity crunch was extended longer than it had to be.
Corporate and Institutional clients began hoarding cash as access to funding dried up. This extended to the smaller and medium corporate space as well – which really has not recovered form a lack of funding. This is all reflected in our jump in unemployment – from a number with a 4 in front of it to a number that begins with a 6.
I recall in early 2009, one Aussie major bank senior manager saying to me that it was as if deregulation had never occurred. The carnage left behind by foreign banks’ exiting meant the locals really didn’t have to do much. His precise comments were, “we’ve never had it so good.”
Which brings me to the point of this article. Thanks for being patient.
Global car companies try and outdo one another by forever turning out better cars because of global competition (usually between Japanese and European brands). The Americans did not play that game for many decades and their industry needed bailing out.
The financial system in Australia is also lacking in competition. The last few years (since the GFC) has been largely defined by which industries and financial products our banks abandoned rather than any innovation.
The global players will return, because they will see that they will be able to offer better. This time the lack of a branch network will not prevent them from succeeding (although there’s no guarantee of success). Who uses a branch these days? The only thing that will stop them is if our financial institutions start investing – as the car industry does in research and development – in new, revenue rich products.
I recall working on new and innovative products from swaps to securitisation. Both have been vilified since the GFC as being manipulated by unscrupulous bankers.
As we’ve seen with Volkswagen’s manipulation of emission testing results recently, if crooked people get hold of wonderful products they can cause a lot of reputational damage to the organization, industry and nation that product is built in.
This doesn’t mean you abandon innovation. I bet the car industry regulators will not be saying to the car makers stop developing better products because a few bad apples manipulated the system.
And yet this is precisely what has happened in the financial world. Instead of having better supervision, the regulators have cracked down on innovative products. Securitisation has become a dirty word. Anything with the word synthetic in it is not allowed in a financial product.
The up-shot is that banks have been forced to lend to a narrower field of borrowers. Any small business without security will find it difficult to get funding – regardless how good their cash flow is. Reason? The banks have to put more capital against unsecured lending. Thus making it more expensive.
This has meant that our economy continues to stagnate in the aftermath of the mining boom. Small business is being starved of funding. This segment is the largest employer of people.
So always be mindful of what you don’t see. Like the internal combustion engine, it may not be pretty but you don’t get far without it.