There’s an interesting piece by Ian Rogers at Inside Story regarding the profits of the big four Australian banks.

He goes through the data and finds that the big four are making returns on equity in the vicinity of 18-20 per cent, suggesting that “the profits of major banks in Australia were the highest in the world during 2010”. Rogers summarises:

In other words, while bank executives continue to talk about “challenging” conditions, the data suggests the opposite: bank returns are rising, and are nearing levels experienced in the later years of the boom.

We would clearly rather have profitable banks than unprofitable banks, but is it right that highly protected institutions are able to deliver circa 20 per cent returns? The risk associated with those returns is greatly reduced by the implicit and explicit taxpayer guarantees attached to our banks, making the profitability of Australian banks the business of all of us.

As Chris Joye put it,

[T]axpayers have effectively said that they will insure away the risk of bank failure… what do these actions tell us? They clearly illustrate that bank shareholders get the benefit of a raft of… protections that are not supplied to other private companies. Given taxpayers have revealed that they are willing to insure away much of the downside risk associated with catastrophic bank failure, these institutions have, by definition, significantly lower equity risk.

If the probability of loss associated with investing with the majors has declined care of these profound changes to our prudential system… the expected returns should also fall. 

Joye goes on to ask the crucial questions:

given their protected-species status, should the banks be subject to stricter regulatory constraints on what businesses they can and cannot operate? Should they just stick to their knitting and focus on savings and loans? Do they need to be stockbrokers, corporate financiers, investment bankers, proprietary traders, and bankers to businesses and home owners in, say, China?

Wandering around Singapore recently, I saw a double-decker bus covered in advertising for ANZ, and pondered similar questions.