The harsh truth is Australia has too many bankers

During the housing boom years the finance sector became bloated.

During the housing boom years the finance sector became bloated. Photo: Getty

Behind any middle-income job loss is a human story, so there’s nothing to celebrate in 6000 employees being earmarked by National Australia Bank to lose their jobs in the months ahead.

The Australian Financial Review draws a direct line between those job losses and the damning findings of the banking royal commission – as dodgy loans based on “fake documents” dry up, so will the head count required to manage them.

NAB denies that link, insisting instead that it is “reshaping [its] workforce to become simpler and faster for our customers” and offsetting the 6000 redundancies with 2000 new jobs.

NAB’s defence is almost plausible in a sector where smartphones, apps, and new approaches to handling clients’ accounts and transactions have come along in leaps and bounds.

But there is a bigger story in the background that affects all banks, and particularly the big four that dominate Australia’s mortgage-lending market.

In its simplest form, it’s this: the credit boom is over, and banks will have to occupy a smaller place in the national economy in the years ahead.

As the chart below shows, three of the big four banks have substantially increased in size relative to the overall economy since the housing boom began around the turn of the millennium.

The ‘market capitalisation’ of each bank reflects the profit it can make each year, and the profits of the big four have been huge and enduring – helped by the tax breaks of negative gearing and the capital gains tax discount, and the mania for property investment that began in the early 2000s.

During that decade you could hardly turn on a TV without seeing celebrity tradies teaching us how to ‘renovate and flip’ our way to an early retirement.

Meanwhile, in banker-land the mortgage sizes were growing, the ‘innovative’ ways to sell debt were multiplying, and the head counts and market capitalisations of the banks were expanding.

Comparing market-cap figures to the sum total of transactions in the economy (gross domestic product) is not a precise exercise, but it is robust enough to highlight one simple point.

All things being equal, a nation’s finance houses should grow at pretty much the same rate as the economy.

Bank bosses will protest that their firms have grown ahead of the general economy because of their ‘innovative products’ or the ‘maturing of a sophisticated financial sector’.

But in the big picture, those arguments are false. The citizens, institutions and businesses the banks cater to have also become more innovative, sophisticated and mature.

In crude terms, the banks are there to take the surplus generated by some of those players and turn it into loans to the other players.

Thus, as the economy expands due to population growth and productivity, the number of mortgages, business loans, credit cards, insurance products and so on should remain pretty constant – and so should the banks’ share of the action.

That is obviously not what has happened during the housing boom years.

Westpac’s size relative to the overall economy has increased 64 per cent since the year 2000; ANZ’s by 47 per cent and CBA’s by 41 per cent.

National Australia Bank is the standout – down 40 per cent – but mainly because of its remarkably poor performance in the past decade.

As independent economist Saul Eslake reminded me on Monday, NAB went into the 2000s in the best shape of all the big four banks, but hit terrible trouble with its forays into the UK and US markets.

It was forced to chop off its overseas tentacles via a series of de-mergers, hence its anomalous decline in relation to the overall economy.

But the other big three serve as a good proxy for Australia’s banking sector. It grew too large during the boom years and now, as house prices turn and restrained wage growth prevails, it has to shrink back to normal.

Out in the community, retrenched workers deserve our respect and assistance finding jobs in other sectors.

At the macro level, however, it’s important to remember that no finance sector should grow this big unless – like Switzerland, Luxembourg or the Cayman Islands – it’s mainly serving non-domestic customers.

The sector is bloated at every level – head count, capital employed, marketing spend, loans sizes, and, of course, profits.

As all these metrics come back to earth, the Australian economy is heading back to more ‘normal’ times.

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