Stevens To Banks: Get Back To Basics

The Age

Thursday July 10, 2008

Ari Sharp

RESERVE Bank governor Glenn Stevens has hit out at complicated banking business models, urging banking executives to look at the fundamentals that have underpinned the success of locally based banks such as the Bendigo Bank, which last night celebrated its 150th anniversary.

Speaking at a dinner to mark the sesquicentenary of the Bendigo Bank, which began as a building society and has since merged with Adelaide Bank, Mr Stevens attributed its longevity to "generations of managers who had a good assessment of risk, plenty of common sense, a strong attachment to their core business and an ability to resist temptations of exotic new opportunities".

He contrasted this with the management and boards of some of the world's largest banks, which he said had not met that standard over the past decade.

"Recent developments exposed the risks inherent in a business model involving heavy reliance on wholesale, short-term funding and securitisation of loans," he said.

"The virtues of a well-run, straightforward business model, reliable retail funding, strong knowledge of the local market and a suite of attractive retail banking services came once again to the fore. Soundly run institutions have seen a rise in their market positioning relative to more risky ones."

Since the onset of the subprime lending crisis in the US last August, world credit markets have tightened, driving up borrowing costs. Several big banks have felt the chill, with the collapse of Bear Stearns in the US, and the bail-out of Northern Rock by the Bank of England.

"At the global level, it will obviously be critical to restore the proper functioning both of capital markets and of major international financial institutions," Mr Stevens said.