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Keating concerned as big banks get bigger -

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Keating concerned as big banks get bigger

Eleanor Hall reported this story on Wednesday, September 23, 2009 12:34:00

ELEANOR HALL: Well New Zealand may be out of recession but Australia's former prime minister Paul
Keating is not convinced that the global financial crisis will leave Australia, and its banking
sector in particular, unscathed.

Mr Keating says he is concerned about the reduction in competition in the banking sector in the
last year that has seen the big four banks now writing more than 90 per cent of the country's new
mortgages compared to around 60 per cent before the crisis.

Mr Keating joins me now in The World Today studio. Mr Keating welcome and thanks for coming in.

PAUL KEATING: Thank you Eleanor.

ELEANOR HALL: Australia's banking sector has come through this financial crisis better than almost
any other country in the world, the banks are strong and stable; why do you have a problem?

PAUL KEATING: Well, they are strong and stable because, fundamentally because of a policy I
implemented in 1990/91; this is what's called now the four pillars policy. That is, I wanted to see
banks into separate and discrete units operating effectively without the cross contagion of
becoming too big.

There's a great debate in the world now about this question of too big to fail - if an institution
becomes too big then the onus falls on the taxpayer to maintain the solvency, far better to have,
to have smaller discrete units operating and Australia adopted this policy 17 years ago.

ELEANOR HALL: Were you predicting the crisis at that point?

PAUL KEATING: No it's just that, you just can't fall for the bankers' nonsense about we've got to
get big to grow up. I mean the fact is if they become too big they present a systemic risk.

Now, so the good news is, our banks did better because of the separation, but the less good news is
that the cost of this crisis has been that they have swallowed up some of the second tier banks,
like for instance Westpac swallowed up St George, the Commonwealth Bank, Bank West, and this has
reduced competition particularly in the housing market and we are to see the effects of this in
interest rates.

ELEANOR HALL: But hasn't the market though done what it is meant to do in these sorts of
circumstances; I mean, shaken the system out and allowed the most capable banks to survive?

PAUL KEATING: No, no, it's not that. All that happens is central banks get into a huddle whenever
there's a real financial crisis and the central banks want stability in the system so they don't
mind the big banks swallowing the small ones.

But central banks are never interested in competition, they are not the primary regulator for
competition, that's got to be with the Treasurer and the Government.

ELEANOR HALL: But what should the Government have done?

PAUL KEATING: Well basically, probably supported Bank West; with St George I never would have
agreed as Treasurer to allow St George to go into Westpac because you go from six banks or seven
banks to four.

And in the end what they'll do is, working on the basis never give the suckers an even break,
they'll simply put the margins up. So we believe, I mean it's good our four banks are well managed,
they've had good managers, they're now into wealth management which is a good thing.

For example Westpac acquired BT and all their superannuation savings, Commonwealth acquired
Colonial First State, NABs acquired Aviva, and the ANZ is in a position where it could acquire, and
I think in public policy terms could acquire, businesses like AXXA or ING. All that makes the four
solid, but what we want is a competition.

You see, in 1992, the margin on a housing loan was 350 basis points, 3.5 per cent over the cost. By
2007 that had reduced to under 1 per cent, so it was under a third, 90 basis points. So it went 325
to 90.

ELEANOR HALL: And it's rocketing back up again now.

PAUL KEATING: And that 2.5 percentage points was enjoyed by every homeowner in Australia. So we
just can't afford really for that competitive quality to leave.

ELEANOR HALL: And yet aren't you endangering consumers if you encourage them to go to the smaller
banks - Suncorp, Metway and other smaller banks like that - that were actually in trouble during
the crisis?

PAUL KEATING: Well they were only in trouble in the extent that their book, their assets were being
supported by borrowings offshore. If they pull the size of their book, their assets back to more
closely match their domestic deposits then we're fine.

The real trick in all of this is to separate the utility function - that's a bank buying deposits
and lending them safely against good assets - from the casino function which is investment banking,
proprietary products, derivatives, hedge funds etcetera. What I always wanted to do was to keep a
separation between the utility and the casino.

ELEANOR HALL: Now you say the Government should have intervened to prevent competition being
reduced, but I mean it was hardly a priority in the midst of the crisis?

PAUL KEATING: That's what happens you see, in a crisis everyone runs for cover, but afterwards you
get left with a system which is less competitive and I think the Government is now conscious of
that, and that's good, and I think therefore the premium on competition will probably rise.

ELEANOR HALL: How would you score the Rudd government in terms of its response to the financial
crisis - we've just heard the former US president Bill Clinton refer to Kevin Rudd as one of the
smartest leaders in the world today?

PAUL KEATING: Well he's got an eye for quality that Bill. He's always had an eye for quality, he
used to think that about me at the time. I liked him too.

ELEANOR HALL: Now New Zealand has just come out of a recession, Australia actually technically
didn't even fall into one so I guess that's, is that due in large part to the good management of
the Rudd Government?

PAUL KEATING: No, it's the flexibility of the economy, it's the good management of the Rudd
Government, yes, but it's also the flexibility of the economy. The exchange rate, the wages system,
these changes which were put into place in the 1980s and 90s which fundamentally stood Australia in
good stead.

And the Government responded quickly and effectively with the stimulus and the Reserve Bank
responded by dropping the level of interest rates, softening monetary policy quickly - that quick
response by Australia meant that as we saw a fall in private demand, the public demand from the
budget was there to take its place and people's disposable income was increased as interest rates
fell.

ELEANOR HALL: Are we now though in a real recovery or is this a stimulus driven blip before the
world plunges into a double dip recession as many economists suggest?

PAUL KEATING: Well the real challenge now, and this is perhaps more of a challenge for the
Americans and the Europeans than it is for us, is to, how do you withdraw the public stimulus and
when do you withdraw it because you can only really withdraw it as a private economy comes up as
investment and private spending rises.

But as you know the Americans overdid spending, and American households are now rebuilding their
own savings, and so of course if they're building savings they're not going to be spending on
consumption at the same level.

So what's going to take the place of that? Well the answer is net exports. The Americans are going
to have to be exporting more, and importing less. And that means an American will be looking at a,
let's say an air conditioner made in Milwaukee compared to one made in Taiwan or in China and
they'll buy the Milwaukee one if the price is right, and the price will be right if the American
dollar falls further.

ELEANOR HALL: What about in Australia though? Is the stimulus overdone here?

PAUL KEATING: Oh no, no, no. And I think the good thing is the Government designed these as one
offs, they don't continue to be a cost to the budget, and as the stimulus comes back, you know, I
think there's going to be a reasonable, given the level of corporate profitability etcetera there's
going to be a reasonable level of private investment and consumption.

So in other words, we ought to be able to make a smooth transition from the stimulus back to the
private economy. Much tougher for the Americans.

ELEANOR HALL: Now Mr Keating we'll wrap it up shortly, but just one final question to you, we'll be
coming to a story shortly on the tensions on the Fairfax board, and a couple of people have
suggested that I ask you whether you're interested in a position on the board?

PAUL KEATING: No, no, no. Board positions, public companies, you know, they're a torture stretch.
No, no, we can just look at all of this as spectators.

ELEANOR HALL: Surely the Fairfax board would be appealing to you?

PAUL KEATING: No, I think, the great days of Fairfax and the print media are probably past us.

ELEANOR HALL: Paul Keating, thanks very much for joining us.

PAUL KEATING: Thank you, thank you indeed.

ELEANOR HALL: That's Paul Keating, former prime minister of Australia.