Will Hayne blink? The problems with banks demand tough measures that neither they nor their regulators want

As the final round of what the Twitterverse calls #BankingRC ended, two of Australia’s most highly respected business journalists sought to sum up what has emerged in the 68 days of hearings. They didn’t hold back.

Adele Ferguson said it had exposed rampant institutionalised corruption. The ABC’s Peter Ryan said that, after 34 years in journalism, it had struck him that the royal commission was not so much a finance story as a crime story.

If you were to take both assessments at face value, it would look as if Commissioner Kenneth Hayne’s final recommendations in February will be straightforward: criminal prosecutions and sweeping changes to make the costs of misconduct much higher.

However, as we argue here, there are grounds for concern this won’t be the way it plays out.

Hayne under pressure

This isn’t because Hayne and senior counsel haven’t been diligent in exposing the problems, but because they now have to make a choice between acting on the concerns of victims, or the concerns of those who think that recommending anything (other than asking banks to say sorry and do better in the future) will threaten financial stability and economic growth.

The stakes are suddenly high.

Acting on the concerns of victims and protecting the public requires a three-pronged approach:

1. Ending the traditional exploitative but lucrative business model
2. Tightening regulatory oversight
3. Reforming the basic building blocks of corporate governance

The finance services sector knows it will have to do something, but it wants to do as little as possible. It’s prepared to raise the spectre of financial instability in order to get away with it.

The illusion of change

It is keen to create the illusion of change – divestitures, executive departures, reorganisations – even before Hayne reports.

Its supporters are putting forward minor red-herring solutions already known not to work, such as increasing financial literacy and “professionalising” selling.

The regulators who have traditionally supported it are launching long-delayed court actions, even though putting bankers behind bars requires watertight cases.

The threat of instability

At the same time external pressures on the commissioner are being ratcheted up.

There is talk of a credit crunch if banks are forced to obey the law and lend responsibly.

Reserve Bank governor Philip Lowe told a parliamentary committee that an overreaction could “stifle innovation”.

Neither the Reserve Bank nor the Australian Prudential Regulation Authority seems keen to accept that the nature of big banks could itself threaten financial stability.

Even though big banks are riskier

That is certainly a finding of longitudinal studies of European banks during and after the global financial crisis.

The big shareholder-focused banks were found to be systemically riskier, less efficient and have lower-quality loans than the smaller not-for-profit banks overseen by boards with employee-and-union-elected directors.

Read more: Research suggests bigger banks are worse for customers

Business models also made a difference. Universal banks that cross-sell financial products were found to be riskier than banks that simply take deposits and provide loans.

They are in denial

The big banks themselves don’t seem to get that their size, cross-selling business models and shareholder-focused boards are part of the problem.

In the final fortnight’s hearings Westpac’s Brian Hartzer was belligerent. ANZ’s Shayne Elliott said his bank had been a victim of credit growth.

AMP chief executive Mike Wilkins blamed bad apples. Commonwealth Bank chair Catherine Livingstone and her new chief executive, Matt Comyn, blamed their predecessors.

The National Australia Bank’s Ken Henry said the problem was a culture that would take years to change. His chief executive, Andrew Thorburn, spoke of “organisational drift”.

They are trying to sidetrack discussion into a narrow debate about how bank directors should interpret their duties, rather than a broader discussion about the nature of banks and who their directors work for.

Anything but structure

Former Institute of Company Directors chair Elizabeth Proust doesn’t see the need to make banks accountable to their customers given that “boards already take non-shareholder interests into account”.

The chair of the Australian Competition and Consumer Commission, Rod Sims, doesn’t see it either.

“We don’t want companies to get confused, so I think their duty should be just to the long-term interests of shareholders,” he said.

Hayne is at risk of being sidetracked into wrestling with what he at one point called a column of smoke – organisational culture.

In the final round he invoked the Group of Thirty as a definitive statement about how to fix bank culture.

Read more: A tip for bankers ahead of the royal commission: be more like doctors

The Group of Thirty is a private think tank made up of a who’s who of ex-central bankers, academics and banking executives, including former Westpac chief Gail Kelly.

Its 2015 report might be the source of incoming AMP chairman David Murray’s line that you can’t regulate for culture.

But the research the Group of Thirty relies on is old, United States-focused and equivocal.

Read more: In defence of ASIC: there's more to regulation than prosecution

If its views are accepted, it will be left to boards and executives to reform themselves.

Worse still, they won’t get much assistance. Australian Prudential Regulation Authority chairman Wayne Byres has told the commission that his organisation not only lacks the skill set to oversee cultural change but doesn’t want the job.

Culture is a column of smoke

You can see where things are heading.

If everyone starts talking about changing culture rather than rules and structures, little is likely to change.

Adele Ferguson is right to worry out loud. “This is a moment in time that won’t easily be recaptured. Let’s hope it isn’t squandered,” she said.

Indeed.