What it will take to redeem the banks



Now that the royal commission hearings into the banks and financial institutions have finished, people are asking whether things will change. There are grounds for both cautious hope and pessimism. Hope is based on the expectation that the exposure of greed, complacency and lassitude in institutions, boards and regulators will lead them to hunger for a better reputation.

A general view of a Westpac bank branch (Robert Cianflone/Getty Images)The grounds for pessimism are the reappearance of the claim that the royal commission has hurt Australia by destroying trust in the financial system, the well-coached defensive strokes of those bank representatives who most recently appeared before it, and the fashionble criticism of 'virtue signalling'. This phrase implies that ethical behaviour is irrelevant to the real duty of banks to benefit their shareholders.

The questions these defensive moves raise are whether changes in behaviour will be more than cosmetic and short lived, and whether those responsible within and for financial institutions have accepted that there is a problem that needs fixing.

The appearance of Dr Ken Henry, the chair of the Commonwealth Bank and former governor of the Reserve Bank, at the commission sharpened this question. He was consistently terse and rebarbative in his answers to questions about bad behaviour, as if to ask, 'What else would you expect?'

In his response, however, he also mused with surprising impunity about larger questions, including the accountability of banks. He went beyond the dogma of sole accountability to shareholders to include customers, staff and, with a sense of daring, the national good.

This idea, standard in Catholic thinking, is inimical to the economic ideology of Treasury and economic commentators who see the public good secured by the contractual arrangements between individuals and businesses seeking profit in a free market. They have seen the imposition of ethical and cultural obligations that are not subject to statistical measurement as dangerous nonsense. Displays of compliance with these values is simply virtue signalling, equivalent to the flag waving at football matches by spectators who want to make their team look good. They have no effect.

This view ignores the reality that banks, like all human organisations, are networks of interlocking relationships that need to be harmonised if they are to work effectively. Organisations do things, and most produce things, but their reason for existence is not defined by what they produce or by the profit they make. Nor do they consist of disconnected individuals who work in isolation. A good bank is one in which money is received and lent fairly and sustainably in a way that respects the relationships with customers, shareholders, employees and the citizens as a whole.


"The royal commission will be successful if it leads to change within all the relationships that constitute financial institutions. They must create a culture of awareness and responsibility in all their relationships."


In financial organisations the relationships extend to the whole nation and indeed beyond it because finance is based on trust between people in their economic relationships. A condition of that trust is appropriate regulation and accountability in those relationships. That trust needs to be built internationally by good conduct in the institutions.

From this perspective it is self-serving to say that the primary purpose of any business is to make a profit. It is also inadequate to say that the bank's sole responsibility is to its shareholders. That relationship is important because shareholders are essential to the banks' other relationships to clients, staff and society, which must also be fair, sustainable and transparent. Irresponsible and self-interested lending can be highly profitable for shareholders in the short term, but in the longer term it threatens both the banks and the society of which they are part.

If this is so, the royal commission will be successful if it leads to change within all the relationships that constitute financial institutions. They must create a culture of awareness and responsibility in all their relationships, with the result that decisions taken at all levels in the bank respect all the relationships.

In some banks there are signs of progress. At small group meetings staff are encouraged to speak of the satisfaction of people who deal with the bank instead of the profit they have made. This kind of conversation is not virtue signalling in the sense of cosmetic and incidental PR, but is essential at all levels to ensure that the trains of transactions stay safely on the rails of respect and avoid derailment.

This can happen only if executives and boards get it. Their behaviour at the earlier and later hearings of the royal commission did not inspire full confidence. The signs of hope come from lower levels in the bank. For example, in the NAB internship programs that have placed selected African immigrants in the bank, many staff members caught up in the relationships shaped by this program came to see their work in a much broader ethical context. That kind of conversion is the seed bed of hope.



Andrew HamiltonAndrew Hamilton is consulting editor of Eureka Street.


Main image: A general view of a Westpac bank branch (Robert Cianflone/Getty Images)

Topic tags: Andrew Hamilton, banks, royal commission



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Existing comments

The threat of long term imprisonment and even the death penalty has never deterred those driven by their own greed or lust for what they perceive as "the good life". Sadly, even if the Commission does result in criminal charges and penal servitude, big business and the banks will never change - they will simply devise new ways to steal without detection. The only penalty likely to have any effect would be the reclaiming of the ill-gotten profits both from the companies and their executive and managerial personnel.

john frawley | 05 December 2018  

Well expressed Andy, My first employment after leaving school in Year 10 was with a small country branch of the Bank of NSW (now Westpac) in the mid sixties, indeed the year of the introduction of decimal currency. We had three other bank branches and an Agency in the town, two pubs, a general store and quite a few small business in the main street. The post Office was located several streets away from the business district. We had a manned railway Station and regular daily train service to and from Sydney as we were on the line to Griffith. The town was prosperous as farm produce prices were high and the tin mine was making a profit. The Manager was a fatherly gentleman who really cared for his staff of three. We had a fantastic relationship with our customers, mostly farmers, small local businessman and the big local employer and easily our largest account , a tin mining company, whose mining operation was located some kilometres out of town. We received a salary. There were no lurks and perks. No pressure to sell 'products' to the customers, just honest friendly service. I fondly remember the ethics, pride and honesty we showed in our dealings with our customers, all of whom we were on first name basis with, as they came in to do their daily banking. We even closed for an hour from midday, after opening at 10 am and closing at 4 pm. We generally did not go home before 6pm most nights. The Manager had the final say, no decisions had to go to Head Office in far off Sydney. Some years ago, I happened to pass through this quiet friendly town on my way to somewhere else. The tin mine had ceased operations,the Bbanks had closed, one of the two pubs was vacant, the General Store, next door closed , the Greek owned café gone, most shops were boarded up, the Railway station unattended and no train service ran , even the local Post Office had closed. How very sad! No bank! no hope! No future! No profit in a country bank branch anymore.... Do I have any hope of a change in the ethics and morals of 'big business' such as the banks? Nope!

Gavin O'Brien | 06 December 2018  

Banks have been allowed the current light hand of government regulation on the assumption of an informed marketplace, the essence of working capitalism. The Hayne RC has demonstrated beyond any doubt that this market place (the average punter) has not been sufficiently informed to avoid rampant malpractice. The reality is that informed purchase of the banks’ products and practices demands a sophisticated level of financial expertise, a level enjoyed by very few, and a classic case for effective government intervention. A People’s Bank (renationalise the CBA?) would go a long way to setting benchmarks not influenced by greed, thus ensuring informed competition and the protection of consumers, while minimising regulatory controls and the need for other forms of government intervention.

Peter Johnstone | 06 December 2018  

This morning I was at an AFIC presentation who, about Banks indicated that Westpac was the most proper of the head four but not including the Local Banks

John Morkham | 06 December 2018  

The new bank bank rort is balance transfers on credit cards. Honeymoon periods vary from 6m to 18m. On purchases the lowest rates are 12.49%. On cash advances there is a litany of new payments that have been defined as cash advances, eg payment of insurance,eg withdrawing cash directly from an ATM or over the counter at a bank branch;The purchase of travellers’ cheques; Gambling transactions such as purchasing chips at a casino or with a betting agency and the most prolific one, BPAY transactions where the biller does not accept regular payments from a credit card. Credit card cash advances accrue interest at a higher rate than interest on purchases, sometimes charging twice the interest up to 24.5%. And the ongoing rort is account keeping fees. People are penalised for holding savings as the banks just take up to $10 a month. I had a savings account with a credit union which amalgamated with a bank. Where there were no fees when I opened the account, inexplicably monthly account fees accumulated and I was down a few hundred dollars. Its a huge ongoing rort and a disincentive to savings.

Frank Armstrong | 06 December 2018  

The problem for the banks, the church, the political parties, big business, etc. is that they naturally form hierarchies, in which control is centralised and defined for all its members. Group control and "group think" come to dominate. The principle of subsidiarity goes by the board. Subordinate members are not free to do things. Creativity is stifled. Non-members are seen as opponents, and the hierarchy has much more power in its sphere of influence, and cartels, de facto, are easy to form. The national good goes by the board. Regulation frequently fails owing to capture by the regulated. Once upon a time, the banks, for example, were decentralised and the local bank manager was in control. But he was a member of the local community and had skin in the community's game rather than that of the bank. I believe that is why Independent candidates are prominent in current elections, because they depend on looking after their electorates. I do not know how we redeem our various polities, including the banks, but solutions must address subsidiarity as well as regulation.

Peter Horan | 06 December 2018  

It’s sad that so few Australians use Credit Unions.

Michael Cosby | 06 December 2018  

Nicholas Moore gave the RC a finance lesson on how to run a bank. Macquarie changed its remuneration rules in 2010 where the most senior staff would be 70% retained on profit share ( not bonus ) payments. This retention would then be released over the next 6 years in equal amounts. This "release schedule" better matched the remuneration cycle to the product (sold) life cycle. ie. It prevents people hiding bad products or profiting from products that have a bad outcome years down the track. To John Frawley's point, the issues can be solved but require strong HR practices, strong CEO's and extremely competent boards. Example in point, Macquarie competes in a global market place and has been able to change executive behavior because of their timed release of previous incentives won/received. And just to be sure, if your behavior is unbecoming or you make mistakes on credit/reputation or compliance you will lose the retained amounts and be fired. Presto ! A bank that rewards excellent behavior and punishes bad behavior. Alas, they can compete globally with a substantially Australian educated workforce. There are not many other examples in Australia unfortunately .... when was the last time you met an employee of the big four and were really impressed... ever ?

Patrick | 07 December 2018  

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