JIM COOMBS. MEMO to Kenneth Hayne: the ‘four pillars’ of the system you are reviewing are NOT set in stone. As they crumble it is worth looking at what went before.

The present four pillars of the banking system are not a necessary evil or inevitable. History tells us why.

1. Before 1932 savings bank and mortgage loans were usually undertaken by government owned state banks. Indeed, in 1932, the State Savings Bank of NSW (owned by the State of NSW) was the biggest savings bank in the world. Then the London bond holders forced Lang to merge it with the much smaller Commonwealth (also state owned) Bank of Australia. The mouse was made to swallow the elephant. States other than NSW also had state banks with much the same functions. The “commercial banks”, out of which the four pillars have grown, concerned themselves with business loans and transactions between corporate or business entities.
2. This left the Commonwealth Bank (which served to some degree as a central bank) as the principal savings and mortgage lending institution in the nation, along with the smaller state savings banks in states other than NSW. This was so until the 1949 election, which was fought to some large degree on Chifley’s proposal to nationalise all banks. Non-Labor vehemently opposed this and called for the head of my father, “Nugget” Coombs.
3. Menzies was elected. Coombs survived. The result was that within a few years, the formerly “commercial banks” were to enter the “market” of savings banks and mortgage lenders, in “competition” with the elephant Commonwealth Bank, then the almost universal savings and loan bank, and the smaller state savings banks which had previously existed, and continued to do so.
4. In the 1960s, the Menzies Government took the view that a central bank regulatory role, which the Commonwealth Bank then had, was inconsistent with its place in the market place of retail banking. It had an “unfair” competitive advantage. So the “central bank” function was hived off to the Reserve Bank of Australia, and Coombs went with it. The Commonwealth Bank, as a state owned  bank was a “peoples bank” competing against the “commercial banks”. One might think  that would be a useful government tool against private enterprise excess. What was left of the Central Bank regulatory role, as compared to the now customary blunt tool of interest rate adjustments, is far from clear. The non-government banks grew and grew like Topsy, some went by the wayside, and were absorbed.
5. In the 1980s, the Hawke government, with Paul Keating as Treasurer, decided to “privatise” the then state-owned Commonwealth Bank. This no doubt paid money into the exchequer, and it was said, by Keating, that this would lead to a flowering of competition between the banks, encourage new entrants, lowering charges to customers. Little of that happened. A few overseas banks entered the market, but the big banks merged, and along with the new “private” Commonwealth Bank, operated as an oligopoly with charges and practices virtually the same amongst them. There may have been some slight competition for large deposits at the margin, but the deal for savers, and mortgage borrowers was both dismal and uniform. With no bank of its own the government could hardly lead the way. And of course, the CBA, was just one of the oligopoly.
6. What is to be done? One proposal, from economist Nicholas Gruen, is to restore the Reserve Bank to the position the then central bank, the Commonwealth Bank, had before 1948.  In addition to its central banking role it would become a people’s bank, accepting savings and providing housing and other domestic loans. There would be no cost of buying back the old Commonwealth, and there would be a government-backed competitor in the market place. There would also be much more ethical supervision, and one might imagine, a significantly lower cost to the customer. Is there any reason why not, except that we have come to believe, rightly or wrongly, that the big four and co are an inevitable part of the landscape.?

Justice Hayne, we don’t need to know who the guilty are . That is patently clear. What we need to know is whether there is a better way forward. The lessons of history, and what we learn from them.

Jim Coombs is a nearly retired magistrate and sometime economist