Where is the wisdom in banking?
Our chief bankers may be clever, but, collectively they are not wise.
Seeing the CEOs of the Big Four banks saying sorry to the members of the House of Representatives Standing Committee on Economics might have produced a little, and well deserved, sense of schadenfreude for many Australians.
While one cannot truly look into the heart of another, the authenticity of the bankers' contrition might at least have been questioned: say sorry to a one-week parliamentary inquiry and you may never have to face a Royal Commission which can call evidence on oath.
Nonetheless, the inquiry did produce some useful information. What if we were to assess this using some ancient criteria: Aristotle's five intellectual virtues and eleven moral virtues outlined in his Nicomachean Ethics 2,300 years ago? These virtues, Aristotle claims, help humans to flourish – and that means society in general benefits, not just the shareholders or senior executives of the big banks.
Certainly one needs craft or technical expertise to borrow and lend at a profit and meet the regulatory requirements of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). But this is not wisdom: one needs theoretical wisdom and practical wisdom as well as nous or intuitive understanding. Underpinning wisdom are the intellectual and moral virtues, which when exercised enable the wise person to exercise good judgment.
Let's begin with Aristotle's five Intellectual Virtues designed to arrive at truth. To be fair, we can grant the bankers that they have the technical skills to add up a row of figures, market financial 'products' and turn a profit. But that's only one out of five. Mind you, Paul Keating would point out that the Four Pillar policy and the liquidity facility arrangement with the Reserve Bank does make their technical job a little easier.
But what about prudence, intuition and what Aristotle calls determining the highest truths of all? In terms of prudence, it is vital to our economic welfare that the banking system is conservative, perhaps a little more like the 1970s when you put on your best suit and cleaned your nails to meet the local bank manager who was as scary as your headmaster used to be.
Instead, the banks, according to the highest authorities, are lending relatively indiscriminately. As far back as 2005 the then RBA chairman, Ian Macfarlane, warned that for more than a decade, household indebtedness had grown at a rate well in excess of household incomes. Ten years later, the graph is still heading north. Australians' private debt now represents 125% of GDP, one of the highest levels in the world, because bank staff are required to entice customers into taking out higher levels of credit card and mortgage debt.
The regulatory authority APRA has warned that the banks' lower lending standards on credit growth, issuing 3.4 times more loans than they could have under previous rules, and the ability of borrowers to service home loans, is troubling. Given that the P in APRA stands for "prudential", this does not instil confidence in the banks fulfilling their fiduciary responsibility.
In terms of intuition – using past experience to prepare for the future - APRA's executive general manager, Charles Littrell, said that the concentration of lending by the big four banks into property markets is a 'perpetual concern' for the prudential regulator. APRA's chairman, Wayne Byres, declared that recent lending issues were 'eerily similar' to 2007.
To sum up the intellectual virtues, our chief bankers may be clever, but, collectively they are not wise. When we get to the moral virtues, the report card is depressingly similar.
Temperance is hardly displayed in the fact that about 70% of CEOs' salary – which is 200 times average weekly earnings - is in incentives. Clearly they're the wrong incentives. Where is the magnificence, the "mean" between vulgarity and stinginess, and where is the generosity in the Commonwealth Bank's insurance arm delaying payments to terminally ill policy holders in the expectation that they would die first? Or in withholding a life insurance policy by ignoring the coroner's ruling and simply declaring that the woman had commited suicide?
Another moral virtue is magnanimity, the mean between the excess of vanity and the deficiency of pusillanimity. Where is the magnanimity in banks continuing to stack up profits far beyond global averages, and claiming it is because of the acuity of their CEOs?
Australian banks were set up with effective legislative support to ensure that they cannot fail, which comes at the cost of consumers, not from a small 'haircut' that might trim their profit a little. When a taciturn and profoundly and (deliberately) dull Governor of the Reserve Bank says 'Maybe we need to look at a way of making the big banks pay a little bit more out of their record profits instead of passing it all on to customers', this is the equivalent of a householder throwing a shoe and swearing at the TV.
All professions have an aspirational statement of their values upholding the dignity of humankind and committing themselves, just like Aristotle's Nicomachean Ethics. Among other things, the Australian Bankers' oath includes the following: "Trust is the foundation of my profession. I will serve all interests in good faith. I will help create a sustainable future. My word is my bond."
Maybe the bankers need one more of Aristotle's moral virtues to make that come true: courage.