People’s banks historically not good for people

For two of Japan’s most reforming prime ministers, Junichiro Koizumi and Shinzo Abe, privatising the country’s post office, Japan Post, has been a signature campaign. For Koizumi in particular the post office represented one of the worst blockages in Japan’s sclerotic economy.

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And that wasn’t because it wasn’t good at delivering letters and parcels. Japan Post is also one of the world’s largest savings institutions and insurance companies. For more than a century it was the world’s most significant ‘people’s bank’.

"The question for policymakers is twofold: is the state or private sector best placed to provide the services and infrastructure; and, if it is the state, is there an opportunity cost?”

The problem was, it wasn’t actually good for the people. As Koizumi famously asked, “why should the interests of 120 million people be ignored for the vested interest of a few thousand bureaucrats?”

It’s a question still worth asking today as governments - in Australia and elsewhere - look to populist or special-interest projects funded by taxpayers in banking, infrastructure and telecommunications.

In Australia, for example, one end of the political spectrum is promoting a ‘people’s bank’, the other taxpayer-owned coal power stations.


Japan Post is a massive financial institution and massively distortionary. Because historically it didn’t have to meet the same financial regulation as the private sector nor pay the same insurance and fees, it could offer higher savings rates. That drew in massive deposits, just under Yen200 trillion on latest figures.

The government in turn used those savings to support its own vested projects, usually buying Japanese Government Bonds – at prices vastly below what they should have been (because it was a closed system) which in turn allowed the government to run up massive budget deficits and government debt.

Ultimately the system couldn’t persist (for one thing, because JGBs paid such low interest, private sector organisations forced to invest in them couldn’t make a decent return) but unwinding it has so far taken more than two decades and still isn’t complete although first Koizumi and now Abe have made progress.

Among a range of distortions it is also arguable the presence of the Postal Savings Bank pushed private sector banks into riskier business, contributing to the bubble economy of the late 80s.

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Source: Bloomberg

Japan Post is a fascinating case study but it is also a timely reminder of the dangers of governments entering private-sector markets on the promise of offering one cohort a better deal.

There are two fundamental challenges in these proposals, whether in Australia or elsewhere.  

Ultimately, the question for policymakers is twofold: is the state or private sector best placed to provide the services and infrastructure; and, if it is the state, is there an opportunity cost?

That is, given all governments have revenue constraints, do citizens get a better return from an investment in financial services or coal fired power stations or something else?

In financial services in particular, recent history does not provide evidence governments are better at providing savings, loans, payments and new technology than the private market.

Of course, we have a Royal Commission running in Australia at the moment which is providing a daily litany of mistakes and poor behaviour in the industry. But this is a commission specifically into misconduct – not a review of the financial system in general as was the Murray Inquiry.

Those very real issues of misconduct aside, recent history does not provide evidence financial institutions globally do better in government hands.


In the last three decades in Australia, we have seen the collapse of multiple financial institutions but no significant banks – apart from the State Bank of South Australia and the State Bank of Victoria. Neither exists anymore but managed to run up losses of more than $A3 billion a piece (in the 90s), sparking their own Royal Commissions.

This catalyst was the last recession in Australia yet during the biggest shock to the financial system in more than half a century, no major bank in Australia failed – and indeed Australian taxpayers made more than half a billion dollars off the banks in the form of payments for an explicit government guarantee. Australia does not currently have state-owned banks.

The investigations into these state bank failures were scathing. The Auditor-General of South Australia’s report into SBSA stated: “… the Bank’s corporate lending … was poorly organised, badly managed and badly executed. Credit risk evaluation was shoddy.

Corporate lending policies and procedures were not even compended into a credit policy manual until 1988, and even then contained serious omissions. The ultimate loan approval authority - the Board of Directors – lacked the necessary skills and experience to perform its function adequately.”

A key issue for the state banks was being government owned they were not formally regulated by the Reserve Bank, they were just expected to comply with the prudential standards applying to private banks.

In the northern hemisphere, where the worst of the global crisis played out and private sector banks did fail and were bailed out by taxpayers, governments moved to unwind their stakes in these banks as soon as practicable, aware of the both the poor historical record of state ownership but also the conflicts of interest such stakes introduce.

In the US, where the sub-prime mortgage crisis was incubated, two enormous government sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), were forced into 'conservation' by the US Treasury in September 2008.

With their government sponsorship, these two institutions had come to dominate the US mortgage market while their protected status led to greater investment in risky assets. Together they lost nearly $US15 billion and the government had to invest $US200 billion to keep them afloat.

Not only were they 'too big to fail', a moral hazard afflicting big private banks too, the government had a special duty to them.

With state ownership, both the intractable conflicts of interest and the challenges of governance are inescapable.


In Australia, the Greens proposal for a ‘people’s bank’ has suggested the institution could be operated by the Reserve Bank of Australia – which has a role to independently set monetary policy (that is, interest rates) and maintain system stability.

The conflicts arising if it owned a retail bank should be obvious – how would the independent setting of interest rates be preserved? What if its decisions, which they inevitably would, required setting consumer benefit against financial returns?

Actually, there is a recent example of the RBA entering into a commercial arrangement: when its polymer note printing business began to operate as a private entity. That didn’t end well and meant senior RBA officials were potentially compromised by the business, called Securency.

The saga played out over several years in the courts with officials of the company, in which two RBA subsidiaries were partners, convicted for bribery.

The tension between state and private ownership of assets is inevitable and answers are not clear cut. In some cases, such as health and education, the public has clear expectations of government involvement and service.

In financial services, however, the market is already deeply served while government ownership introduces particular conflicts of interest. History tells us government involvement has not been good for taxpayers and fraught from the governance perspective.

What does work for taxpayers is competition. And this is the ideal role for policy makers: removing barriers to entry, ensuring a level playing field, facilitating easy movement by consumers between providers and providing regulators with sufficient enforcement powers.

As Japan’s experience continues to show, state-owned institutions undermine all of these.

Andrew Cornell is managing editor at bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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