If banks have been bad, a royal commission is the best way to find out.
The powers of a royal commission are heavy. It is like a police investigation and a court combined in one. They can issue search warrants.
They can subpoena documents. They can arrest you if you fail to show up. When you do show up, they can compel you to answer questions and put you in jail for six months if you don't.
In Australia, you can't claim the fifth amendment.
The banks are claiming they wanted this royal commission, but the thing about such big and powerful investigations is they sometimes head off in directions you don't expect.
The NSW Liberal Party started a big investigation into corruption, for example, and it took down two Liberal premiers. The banks better hope they've been good.
IS IT FAIR TO SINGLE OUT THE BANKS?
The banks deserve a good, solid looking at. They operate in a comfortable regime. There are only four of them and the bank regulator, the Australian Prudential Regulation Authority (APRA), isn't too fierce. They make sensational profits.
The Australian Competition and Consumer Commission (ACCC) is not exactly convinced there's competition raging.
Its boss recently said the market is "characterised by oligopolies comprising the large banks, who can influence products, prices and other conditions in important markets either alone or together."
We give the banks a good run, so it makes sense to hold them to the highest possible standards.
There are some good hints they haven't all hit these standards. Recently the whiff of scandals has enveloped the financial services industry including in:
1. Insurance
2. Financial advice
3. Lending
When the royal commission starts to drill down into what has actually happened, some banking executives might get very uncomfortable indeed.
WATCH THEM SWEAT
The banks may suffer reputational distress.
Bank share prices could start to rise and fall as each nervous executive takes the stand and is grilled under the full weight of the royal commission.
It would probably be fun to watch while sipping on an ice-cold glass of schadenfreude. Except for the fact that our superannuation is largely invested in Australian shares, and banks make up around a third of the Australian stock market.
A fall in bank share prices would be bad for the Australian stock market and make our retirements that little bit harder.
It could also sap confidence from the whole economy. The problem is, it's too late not to have the inquiry. We let our economy get very dependent on financial services. Now we are dealing with the consequences.
Justice is always good in the long run but in the short-term it can hurt a lot.
ARE ALL THOSE LOAN APPLICATIONS SQUEAKY CLEAN?
Perhaps the biggest risk is what the royal commission finds when it looks at lending.
Imagine it is August 2018 and apartment developers are finishing off a lot of the buildings under construction right now.
The final lick of paint is being applied in the centres of Melbourne, Brisbane and Sydney. The developers hope everyone who put down a deposit will actually still buy the apartments.
The problem is, in our hypothetical situation, apartment prices have been falling.
They're a few per cent lower than they were when the people bought off the plan. The buyers could choose to pay the remainder, or they could choose to just let their deposits go.
In this context, imagine we discover one of the major banks was making loans to thousands of people who could not really afford them. The story is all over the internet, TV and radio. People would begin to realise that some borrowing for housing is on shaky ground.
There are already many rumours of dodgy loan applications.
Swiss bank UBS reckons Australia has $A500 billion ($5.5b) of "liar loans."
An ABC business journalist found the bank had changed the number written for income on her loan.
If that is just the tip of the iceberg, things could get scary. We are already seeing some small signs of a house price downturn.
A long, systematic revealing of how deep the rot goes could turn a minor blip into a big problem.
Of course, it could be that the rot doesn't go deep at all.
Perhaps the banks have been doing a great job in all but a few cases that got publicised.
The thing with a royal commission is you never know in advance. Australia need an investigation with all those powers to find out.
The next few years will be very, very important for all of Australia.
