The Big Four banks have, for decades, unashamedly had their snouts in the trough, making obscene profits at the expense of their depositors.

But all that might be about to end.

In a radical idea, economists Paul Kofman and Carsten Murawski, from the University of Melbourne (published in the Australian Economic Review), have called for an overhaul of the Australian banking system. Most controversially, they have advocated the reintroduction of a public-sector banking institution.

A state-run bank, run for the benefit of its customers rather than its shareholders, would provide core banking services to everyone – not just the rich.

The overall benefit to Australia would be astounding: There would be a marked disincentive for high-risk and fraudulent activity on behalf of the bankers, those at the margins of society would receive banking services denied them at present, and the assets of all Australians could be pooled to chase lucrative investments around the world.

Savings accounts, mortgages, credit and payment services would have external overseers and would mirror those already benefitting European countries such as economic powerhouses Germany, the Netherlands, and Switzerland.

“A major advantage of such an institution,” the two wrote, “would be its focus on core banking activities, in isolation from non-core, higher risk activities.

“Another crucial advantage would be the alignment of the interests of the providers of capital (mainly the government and depositors) with the mission of the institution, the cost-effective provision of core banking services to the public.

“It would (also) mean you would get better deposit rates than are currently available, which is a largely overlooked side of the market (from the banks’ point of view),” said Professor Kofman.

“Where a bank is set up to provide certain core services to the public, which are not high margin, this would be a bank which would not suffer from the problem that our big four have, which is to maximise shareholder return,” Professor Kofman continued.

The institution proposed by the duo would be overseen by an independent board, but backed by the Commonwealth and funded by government equity, deposits and debt interest repayments from the public.

The possible upsides to this idea are breathtaking: With one of the most advanced retirement savings systems and largest pools of assets under management Australia would likely become a centre for global asset management – in particular retirement savings.

“Today’s banking system seems ill-equipped to achieve this global position,” they say in the report. “The big four struggle with too many competing goals and lack incentives to innovate.

“That translates into a lack of attractive jobs, stimulating many of Australia’s brightest graduates to migrate to the major financial centres like New York, San Francisco, London, Hong Kong, and Singapore.

“Solely relying on ‘the market’ to unlock this potential will fail, as it ahs in the past. Whate is required is political and commercial vision and the courage to make substantial changes ot the banking system. In a fast-changing and highly competitive world, a commitment to conserve the status quo will only lead to slow, withering decay.”

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