As the Royal Commission slowly drags on, one thing is becoming very clear, it’s going to be harder for banks to bullshit their way to larger profits.
An act of financial crime or misconduct is at face value a hard act to identify at the very moment when a consumer or institutional investor is marketed a financial product & signs on the dotted line. The reality is, financial crimes are only broadly publicly identified after an event of economic instability, which is commonly caused by a systemic breakdown of the crime itself that pushed an economy beyond its reasonable capacities. More often than not, regulators are aware of financial crimes taking place but turn a blind eye thus prolonging the timeframe. This was prevalent in the U.S and Ireland prior to the GFC, and indeed prevalent today in Australia.
What makes Australia’s situation unique is that the financial system is currently in the early stages of experiencing a significant shift from acting in systemic illegality, to being brought back within the realms of the law ‘prior’ to an economic downturn. Hence looking into the immediate future, there is clearly only one way banks can attempt to increase their profitability, and that is by culling staff before economic nature eventually takes its course.
Using the mortgage market as an example, which is the largest profit driver of our major banks; if the major banks are unable to issue larger loans and increase the size of their mortgage books, their ability to maintain the long term status quo of high growth is cooked. Furthermore, reducing the size of loans to fit within the lending laws in place will leave those mortgage customers who prior to the crackdown on illegal lending– highly exposed due to the fact that there will not be enough new buyers with the debt piles to buyout their existing liabilities. Hence, it is highly likely the Australian mortgage market will experience a serious credit crunch leaving our banking system at the mercy of the global markets.
Whilst many cheerleaders of the Australian property market may claim that the recent housing price falls in Sydney and now Melbourne are just part of a long term cycle that resembles a stairway to heaven, keep in mind that this downturn has more to do with banks having to shift their lending behaviour from ‘illegal to legal’ versus some sort of quiet moment in the housing market whereby buyers have somehow become a bit more picky.
Nevertheless, it’s clear that interesting time are ahead.