Bank Behaviour and Resilience

Bank behaviour shapes the fate of national financial systems and national welfare. The global financial crisis (GFC) has reminded us that the nature of bank behaviour is crucial for systemic stability, national output, employment, economic growth and development in any economy. Specifically, financial system resilience and fragility are outcomes which are often the result of bank behaviour. This book offers a typological theory that distinguishes the conditions under which conservative and opportunistic types of bank behaviour may lead to these outcomes. Conservative behaviours favour prudent bank decisions and actions that increase the resilience of financial systems to weather domestic and/or international crises. Opportunistic behaviours refer to excessive risk-taking in bank decision and actions that reduce the resilience of financial systems to weather such crises. This book identifies minimal within-type variance and maximum between-type variations of these types of bank behaviour.

The aim of this book is to examine how and why multiple structures, institutions and agents interact in informing bank behaviour and financial system resilience, and institutional change and persistence. To that end, the SIA framework and typological theory of bank behaviour have been developed to carry out the analysis and were introduced in Chapter 1. They emerge from an inductive research and benefit from institutional theory and public policy literature that deal with institutional and policy change processes. In this regard, this book also takes an important step toward building bridges among these academic fields. Thus, it is important to locate this book in the broader literature about the variants of institutional analysis and in the literature of comparative public policy and political economy of national financial systems which utilise an institutional analysis.

The previous chapters have shown that this book is an attempt to understand and analyse Australian exceptionalism, to demonstrate the utility of the SIA framework utilising interactions among structures, institutions and agents with special reference to its application to the Australian bank behaviour in a comparative perspective. The aim is to spark a debate towards sufficient understanding of differences and similarities in bank behaviour and institutional outcomes within and across varieties of capitalism. The conceptual framework offered suggests a perspective that incorporates interactions between various structural and institutional complementarities and agents and their impact on bank behaviour and socioeconomic performance.

On 2 March 1996, the Liberal Party won its first federal election after 13 years of ALP rule in Australia. On 30 May 1996, one of the first acts of Peter Costello, Treasurer of the Howard Coalition government, was to establish the third major financial system inquiry (FSI) to review the Australian financial system (later known as the Wallis Inquiry).¹ The Wallis Inquiry was important in the new era of financial regulatory change in Australia because it aimed to address the issues of whether, and if so how, the supervisory and regulatory arrangements at the time should be reorganised to address future challenges. One year later, on 18 March 1997, the Wallis Committee submitted its 700-page final report containing 115 recommendations to the government. Two of the more controversial recommendations of the Committee concerning prudential regulation were numbers 31 and 32. The former recommended the creation of a single prudential regulator to replace the RBA, the Insurance and Superannuation Commission (ISC) and the Australian Financial Institutions Commission (AFIC) while the latter said that this agency should not be the RBA. Following the government’s adoption of these recommendations, Australia became the first country in the world to adopt a functionally-based financial supervisory/regulatory framework, the so-called ‘twin peaks’ model.

The government fully accepted 113 of 115 recommendations made by the Wallis Committee; recommendations 82 and 83 which advanced the four largest banks’ (or the majors) interests on the merger issue were not accepted by the government. One institutional aspect of this regulatory framework was the power granted to the Treasurer under the Banking Act and the Insurance Act to determine whether or not mergers among the largest financial firms can take place.¹ Number 82 recommended that ‘The Trade Practices Act (TPA) should provide the only competition regulation of financial system mergers’ (Treasury, 1997: 425, emphasis added). In doing so, the Treasurer’s power over mergers under banking and insurance laws could be removed. Number 83 advocated removal of the ‘six pillars’ policy — a government ban on in-market mergers between the four largest banks and two insurance companies. The ‘six pillars’ policy had prevented three different types of potential mergers: mergers among the four largest banks; mergers between the largest two insurance companies; and mergers among any of the four largest banks and the largest two insurance companies. Instead, it replaced the ‘six pillars’ policy with the ‘four pillars’ policy, which continued to block mergers among the major banks while allowing mergers between any one of the big banks and the two big insurance companies.

This book has shown that the nature of bank behaviour and financial system resilience within and among LMEs and CMEs and the institutional outcomes cannot be understood from the types of financial systems, whether bank-based or capital market-based; the types of policy networks that dominate the national financial services industries; or whether states have a strong (proactive) or weak (reactive) capacities in financial services. Instead, I have argued that bank behaviour and resilience, and institutional change and persistence can be understood by reference to interdependent processes among multiple structures, institutions and agents. I showed that several structural and institutional complementarities and agency-level enabling conditions reinforcing conservative bank behaviour prevailed in Australia, Canada and Japan whilst contradictory factors reinforcing opportunistic behaviour prevailed in the US, UK and Germany.