Finance Analysis

Odds on regional banks will be gone despite inquiry

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Regional Australia is losing banks, leaving some towns with no access to cash management (Screenshot via YouTube)

Despite the recently announced Government inquiry into regional banking services, it appears the process won't save individual bank branches, writes Dale Webster.

IF THERE IS one almost-certain outcome from the 2021-announced Government inquiry into regional banking services it is that not one bank branch will be saved in the process.

Sportsbet wouldn’t even touch this, the odds are so short.

That’s not good news for anyone in the 92 towns that are now down to their last “big four” bank with no backup, but a read through every final report from inquiries into the banking and financial sector since the 1980s reveals good cause for cynicism.

It shows:

  • branch closures were recommended and endorsed by Australia’s two most important financial industry inquiries, which were both held under Liberal-led Coalition governments;
  • it would go against a fundamental economic philosophy of Coalition governments to tell a bank to keep a branch open on the grounds of welfare;
  • only one banking inquiry committee has attempted to pin banks down to a community service obligation and this was amended and rendered powerless by the Coalition government of the day; and
  • banking inquiries have a track record of leading to further branch closures due to the endorsement of alternative service models.

This has placed Australia in a paradox on the issue of banking services.

On one hand, banks are considered an essential service providing access to the cash deposit and withdrawal facilities needed to keep the wheels of the economy turning. For example, during recent lockdowns due to COVID-19, banks were included on the essential services lists of businesses to remain open.

On the other hand, there is not one government restriction to stop a bank if it decides to close a branch and leave a town without any alternative over-the-counter transaction services.

The steps that have led to this situation can be traced through each banking inquiry starting with financial deregulation ushered in by Sir James Campbell, of the Hooker Corporation, in 1981.

Until the 'Campbell Report' – which mapped out how the financial sector should work under free enterprise objectives for the Fraser Coalition Government – Australia had a number of state and federal government-owned banks.

Campbell determined that these institutions had an unfair advantage over banks operating in the private sector, noting that by nature they were less driven by profits and often filled a “social” role in places where financial services were limited or not otherwise available.

To achieve what he described as 'competitive neutrality' he said government-owned banks needed to be 'economically viable, operationally efficient and compete equally' and recommended that if these banks could not meet these objectives they should be sold or 'wound up'.

Campbell’s recommendations led first to the sale of state-owned banks and then, eventually, the Commonwealth Bank.

Campbell also gave the green light to cutting branch numbers 'in the new competitive environment' and – predicting that this would impact on country regions – took the first official steps towards moving regional customers to non-bank alternatives by recommending a review of the Commonwealth Bank’s exclusive rights to use Australian post offices as agencies with a view to opening this opportunity up to private-sector competitors.

He made it clear that he considered 'direct intervention in the financial system' by the government to keep bank branches open in certain areas on the grounds of welfare, 'inappropriate and, in many cases, counter-productive'.

Following the Campbell Report, there were two banking inquiries held under Labor governments after Malcolm Fraser lost power in 1983.

The first (Vic Martin Review) was to examine Campbell’s findings under the lens of Labor policies, which it endorsed. The second (Stephen Martin Review) contained only one mention of regional bank closures, suggesting post offices and home banking were solutions but made no recommendations. Stephen Martin was responsible, however, for the introduction of a contractually enforceable Banking Code of Practice, which would be significant for regional Australia over time. 

By the mid-1990s, nearly all of the Campbell recommendations had been implemented by the Hawke/Keating Labor Governments.

As soon as the Coalition, under the leadership of John Howard, regained power in 1996 it announced an inquiry to assess the impact of financial deregulation and the forces that were, by then, driving change in the financial system.

This inquiry was led by Business Council of Australia President Stan Wallis and coincided with the completion of the sale of the Commonwealth Bank – finally fully privatised on 15 July 1996, just a few months after the election.

Like Campbell before him, Wallis had his eyes firmly on efficiency and a key finding of his report was that most efficiency gains by banks could be made by changing the mix of service delivery channels in favour of electronic transactions and reducing the density of the branch network. He cited ANZ’s migration of customers to the Postbank system in New Zealand as a success story.

Comparing Australia’s branch density to Canada’s, he suggested that a reduction of about 1,000 locations would not be unreasonable and it was his recommendations that opened the legislative door for electronic commerce that would largely make this possible. (To be fair, Wallis did say that a cut of this size 'would not necessarily mean a reduction of rural service levels, as the majority of bank branches – 60 per cent – are in metropolitan areas'.)

In a chapter titled 'The philosophy of financial regulation', Wallis reinforced Campbell’s comments regarding the inappropriateness of government intervention to keep banks open for social purposes.

He found that:

'... obliging financial institutions to subsidise some activities through "community service obligations" compromises their efficiency and is unlikely to prove sustainable in a competitive market.'

Like Campbell, he suggested that if there was genuine social concern it was best to use the same approach that governments used to fund most other goods and services required by disadvantaged groups: government funding, transfer payments or provision of services.

He said

'If access to financial services is as important as access to transport or medicines, this should be recognised explicitly and funded in the same way.'

The next two inquiries – Money too far away, 1999, MP David Hawker (Hawker Report) and Money Matters in the Bush: Inquiry into the Level of Banking and Financial Services in Rural, Regional and Remote Areas of Australia, 2004, Senator Grant Chapman (Chapman Report) – were held specifically to address the number of branch closures that occurred after financial deregulation.

Regional Australia had by this stage lost about a third of its banking network — although these inquiries had difficulty putting figures around the cuts due to there being no official means of measuring the regional branch footprint. (The Australian Prudential Regulation Authority’s “authorised deposit-taking institutions point of presence” database is a result of recommendations to come from these reports.)

Hawker and then Chapman heard from a range of community representatives who left them in no doubt that the closures had created a cascading range of problems for towns that no longer had access to cash management and banking services.

Hawker highlighted submissions from the National Farmers Federation and the Local Government and Shires Association expressing views that banks had an obligation comparable to utility services, but he danced around saying they were an essential service.

Chapman however, after having his ears well and truly chewed off by distressed communities, made the call outright in a chapter dedicated to looking at the issue of community obligations stating

'The committee believes that access to a basic banking service is an essential service.'

Despite this, neither inquiry would recommend that a community service obligation be placed on banks to keep branches open.

The Hawker Report came the closest to throwing regional Australia a lifeline by recommending that a 'branch closure protocol' be added to the Australian Banking Association’s (ABA) Banking Code of Practice with a clause that would at least pin banks down to leaving behind an alternative service.

It said:

'In the event of closing a branch, banks will be expected to leave behind some form of over-the-counter service that allows access to cash deposit and withdrawal facilities for personal and small business customers.'

This was a significant inclusion and powerful protection for communities but in its official response to the report, the Howard Government wound the requirement back by adding the qualification, “if viable”.

The ABA seized on this. The protocol as it stands today in the sixth version of the Banking Code of Practice has been incorporated into places with a heavy emphasis on the viability caveat. It has likely done so from the original 2003 version but the ABA says it no longer has a copy to verify this.

Chapman later commented on the government’s change to Hawker’s “unequivocal” terms in his report (noting the NFF was particularly critical of the hazy, open-ended terms “that could mean anything”) but no recommendation was made to have the original wording reinstated.

The real goal of both the Hawker and Chapman inquiries was to find alternatives to traditional branch banking but while well-intentioned, the recommendations of these committees have helped engineer the further dismantling of the regional “big four” branch network.

One of the most significant changes to come from this era of inquiry – the opening up of regulations to allow other forms of banking into the market – has proved a double-edged sword.

The introduction of credit unions, mutual banks and community banks have certainly helped fill gaps in towns that have been left without services, but if there is one thing the big banks don’t like, it’s competition, and they have a track record of pulling up stumps in places that have opened community banks or where a mutual bank has come to town.

NAB, for example, has closed all branches in locations except one that also has a Regional Australia Bank. The remaining branch at Barraba in NSW has been reduced to opening just nine hours each week. Heathcote in Victoria is the most recent example of a town that has lost its only remaining “big four” bank – the NAB – after opening a community bank.

Even the prospect of widening of postal banking services to include business banking was disputed by some of the bigger banks, with Westpac telling the Hawker committee it was worried that if rolled out nationally in places where its bank still had a presence, customers might choose to do their banking at the post office rather than come into the branch.

For banks leaving a town, however, the introduction of business banking at post offices (Giropost/now Bank@post) that followed the Hawker Report gave them an easy “out” when it came to meeting the branch closure protocol of leaving behind a face-to-face service for cash transactions without having to open up the “if-commercially-viable” can of worms.

Another initiative championed by Hawker and later Chapman was the privately owned-and-operated “in-store” agency in retail outlets.

This move alone resulted in the closure of 128 regional branches by Westpac between 1998 and 2000 – a 16.5 per cent cut of its original regional network in one hit – when they were replaced by this service model.

By 2015, every single one of these “in-stores” would be gone.

The same for ANZ, which transferred 70 branches to “local link” retail outlets during the same period. These were all closed in 2016, with both banks transferring the services to Australia Post.

Rural Transaction Centres (RTCs), a government-funded initiative to come from the Hawker inquiry, also did not live up to expectations. Chapman later noted the slow progress in take-up and the number of centres that had been set up that did not provide banking services.

The RTC scheme only lasted until 2003 before being rolled into another federal grant initiative and has, according to the Department of Infrastructure, Transport, Regional Development and Communications (DITRDC), disappeared into history with no information available on the current status of any of the centres that were opened under the program.

The Regional Banking Taskforce, announced last year – led by Assistant Treasurer Michael Sukkar and supported by first-term National Senator Perin Davey – will be the first inquiry to look at the issue of regional bank closures in 17 years. (The 2018 Royal Commission: Misconduct in the Banking, Superannuation and Financial Services Industry completely ignored the problem, allowing an escalation of closures that began in 2016-2017 to roll on unchecked until now.)

The terms of reference of the task force are – like Hawker and Chapman have done before – to assess the impact of bank branch closures in the regions and identify alternative models of service.

The timing of the announcement of the inquiry by a Coalition government in the lead-up to a federal election is also consistent with its predecessors, but there are two important differences setting this investigation apart.

The first is that this is exclusively a Coalition initiative, whereas previous inquiries looking specifically at regional banking have been joint-government committees with representatives from both sides of parliament. (Federal Opposition Leader Anthony Albanese sat on the Hawker committee.)

The second is that because of the informal nature of the investigation, banks and organisations such as Australia Post – that have traditionally been asked to appear as witnesses at inquiries – will this time be part of the decision-making team. (Another reason Sportsbet won’t take your money.)

So what are the lessons from all of this?

Given the precedent that a Coalition government will not interfere with a bank’s decision to close a branch is well established, anyone contemplating making a submission to this banking task force with the hope of intervention in saving a town’s last bank will probably be disappointed.

If you believe there is a good argument that your bank is paying its way, efforts might be better directed towards getting a commitment from government to enforce the Banking Code of Practice and make the banks produce business cases to be assessed by the Australian Securities and Investment Commission (ASIC) before a branch closure can proceed.

Stan Wallis provided the annual cost of running a bank branch in his report ($1.6 million, half of which are wages) and this, adjusted for inflation, could be used in conjunction with community bank financial reports as a benchmark for comparison to see if the figures stack up.

Those still wanting to take on the challenge of trying to convince government to step in and save their last bank might try arguing from a viewpoint other than welfare, such as building an economic case.

Hawker noted the correlation between branch closures in regional areas with an increase in withdrawals of cash in the community 20 years ago, so the possible impact of a loss of a further 1,000-odd branches on the shadow economy might be something that could make a treasurer prick up his ears.

If all else fails and the best this new task force comes up with is to again point communities to a beefed-up service at local post offices or some other flash-in-the-pan initiative, there is one final ray of hope for towns faced with losing their last bank.

In a little-read section of the Chapman Report, tacked on after the bibliography, are additional comments by Labor Party members of the committee.

The last paragraph on the last page of the report reads as follows:

Recommendation 30 


1.25: Labor supports the introduction of community service obligations on ADIs [authorised deposit-taking institutions] – the ALP has signalled its preparedness to re-regulate the banks if they do not agree to meet appropriate voluntary community service obligations.

The document is signed by Senator Penny Wong (deputy chair) and MP Anthony Byrne, who are both still sitting members of Parliament.

Because the Howard Government chose not to respond to the report, this statement is the last official word by a political party on the issue of regional bank closures.

If your town is down to its last bank, the existence of this commitment might be a good topic to discuss with candidates in your electorate during the run-up to the next Federal Election.

This article is Part 3 of a series — you can read Part 1 here, Part 2 here and Part 4 here. Interactive maps charting a breakdown of bank closures via electorate can be found here.

Dale Webster is an inaugural recipient of a Walkley Foundation Grant for Freelance Journalism on Regional Australia. She publishes independently through her own title, The Regional. You can follow Dale on Twitter @TheRegional_au.

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