An outlook downgrade from Moody’s Investors Service heaped more pressure on Australia’s highly profitable banks yesterday, after a US lawsuit over alleged rate rigging sparked fresh calls for a judicial inquiry into the country’s financial sector. Moody’s signalled late on Thursday that a ratings downgrade is more likely, a move that would raise funding costs, citing sluggish profit growth, housing market risks, declining loan quality and low wages outcomes after the end of a mining boom.
The move followed an outlook cut by Standard & Poor’s (S&P) in July, and came on the same day Australia’s four dominant banks revealed they were among 17 global lenders being sued by US funds for alleged interest rate fraud. The writ, filed on August 16 by two US-based investment funds and a derivatives trader, fuelled demands for a Royal Commission inquiry into financial sector malpractice ahead of the first sitting of a new Australian parliament next week.
“A Royal Commission would get to the nub of the problem, the core of the problem, a proper examination of the culture and practices of Australia’s banking industry,” Opposition Labour Party treasury spokesman Chris Bowen told reporters in Sydney. Labour says that a series of scandals has exposed deep flaws with Australia’s banking culture that went unnoticed as the industry survived the global financial crisis relatively unscathed. Moreover, the sector posted successive record profits in recent years.
A commission would have farreaching powers to order disclosure of internal communications and question top executives in public and under oath. It would not hand out punishments but it could lead to prosecutions and its recommendations would be highly influential. Prime Minister Malcolm Turnbull has stood by the banks in rejecting the need for such an inquiry, despite strong pressure from Labour and from minor parties which will hold the balance of power in parliament following the July election.
Turnbull said the government was instead considering setting up a tribunal to deal with consumer complaints against banks. “We want to ensure that where there are failings, where there are problems, that we deal with them,” he said. The ‘Big Four’ banks – which are National Australia Bank Ltd, ANZ Banking Group Ltd, Westpac Banking Corp. and Commonwealth Bank of Australia – have denied any wrongdoing in relation to the US writ and pledged to fight the allegations.
Seven of the world’s biggest banks in May agreed to pay $324 million to settle a private US lawsuit accusing them of manipulating interest rates. Banks around the world have been fined billions of dollars over the manipulation of global benchmark interest rates like Libor.
On top the of US suit, the Australian Securities and Investments Commission (ASIC) has laid charges against three of the Big Four for allegedly rigging bank bill swap rates used to price financial products.