Australian banks’ U-turn on conduct probe bid to cut risk

Bloomberg

If you can’t beat ‘em, join ‘em. That’s the calculation Australia’s biggest banks and the government have made in deciding to cave in to pressure for a public inquiry into alleged misconduct in the financial industry.
After months of denouncing the idea of a Royal Commission as an expensive waste of time, the big four banks staged a backflip and called on the government to end the damaging political fight and establish an inquiry. That gave Prime Minister Malcolm Turnbull the cover he needed to carry out his own abrupt U-turn of government policy minutes later.
By taking control of the process, rather than risking defeat to opposition lawmakers and rebel members of his own government, Turnbull has been able to set tight limits on the scope of the probe. It excludes a grab-bag of other issues pursued by opposition
lawmakers — such as pay, excess profitability or the govern-
ment’s implicit guarantee of banks — that could poten-
tially have had far-reaching
implications for the industry.
“The major banks acted in the national interest to minimise more serious risk to the banking sector,” Anna Bligh, head of
the Australian Bankers’ Association, said in a statement. “The
possibility that terms of reference on something this important could be the subject of political horse trading should worry
every Australian.”
By asking for the commission to be established now, the banks have potentially headed off a far more wide-reaching inquiry if the main opposition Labor party
was to win government. The
draft terms of reference task the commission to investigate “any conduct, practices, behavior
or business activity by a financial services entity that falls
below community standards
and expectations.”
The tight deadline should also ensure the probe doesn’t veer off into unwanted territory. Previous Royal Commissions have run much longer: a probe into police corruption in New South Wales in the 1990s took almost three years to report and the inquiry into child abuse, particularly in churches and schools, is still
in train almost five years after
being established.
“This is relatively benign compared to what could have happened,” said David Walker, portfolio manager at Clime Asset Management which holds shares in the big banks among the A$750 million ($570 million) it oversees. “There has been a knee-jerk reaction in the market today, but I think this has been overdone.”
More than A$8 billion was initially wiped off the market value of the big four lenders in early Sydney trading. By midday, most of the lenders had recovered ground. At 12:38 p.m. in Sydney, National Australia Bank Ltd. and Westpac Banking Corp. were up 0.5 percent, Commonwealth Bank of Australia gained 0.3 percent and Australia & New Zealand Banking Group Ltd. rose 1.1 percent.