The Commonwealth Development Bank (and its antecedents) was in operation between 1943-45 and 1996. It has now disappeared completely into history, but its memory demands to be recovered. Evan Jones
The CDB filled a niche in dealing with the particular needs of family farmers and small businesspeople. Such a niche must necessarily be filled by a public bank as profit driven banks are not interested in the necessary commitment of personnel resources and a ‘non-commercial’ low profit return.
Labor Treasurer Paul Keating’s move to privatise the Commonwealth Bank apparatus inevitably spelled doom for the CDB as part of the Commonwealth Bank group. The backdrop was provided by the prejudiced character of the 1981 Campbell Committee report that claimed, on spurious grounds, that there was no room for publicly-owned banks in a freely competitive market environment in which there were no government ‘restrictions’.
Labor also flogged off the Primary Industry Bank of Australia (created in 1978) to Rabobank in 1994, via a bizarre and cynical temporary placement of PIBA in the Western Australian state R&I Bank between 1988 and 1994. The R&I Bank was itself in the process of privatisation. As for Rabobank, it prides itself on its origins in the Netherlands as a cooperative, but there is nothing of a cooperative spirit in its modus operandi.
Officialdom has been in denial since Campbell on the need for special purpose public credit institutions. Nowhere else in the world is a country as subject to opinion dictated by cretins (save perhaps for the Rogernomics period in New Zealand) that provide a cover for the usual vested interests.
Officialdom is thus perfectly happy with an utterly dysfunctional system in which the banks (still dependent on short term deposits from their trading bank origins and short term borrowing) offer facilities that are not fit for purpose via staff not suitably trained for the job, and which default and foreclose on SMEs and family farms at the drop of a hat.
The Hayne Royal Commission, of course, dutifully marginalised the entire issue.
The ‘correct line’ has to be constantly reinforced.
Thus the 1991 report of the Industry Commission (now Productivity Commission), Availability of Capital, which reproduced the Campbell Report’s line. The Productivity Commission, the federal government’s official think tank on everything under the sun, is the imperial unit of cretinism.
Thus the 2010 report of the Senate Economics Committee on Access of Small Business to Finance. The Committee members and the Secretariat that wrote this report seem to have been sleep-walking through the exercise. Informed submissions were ignored.
The creation and continued existence of publicly owned special banks overseas continues to be ignored in Australia.
Most notable is Germany’s KfW bank. The KfW was formed in 1948, with the American occupier’s blessing. It’s still there. Long-term loans are its specialty.
The curmudgeon B. A. Santamaria, from his then regular column in the Australian, devoted an article to the KfW on 19 April 1997 – bringing the attention of this extraordinary institution to Australian readers’ attention. This article was in the context of the bush being hollowed out after decade and a half of adverse economic conditions (not least crippling 1980s interest rates), savage government cutbacks of infrastructure services, and bank brutal foreclosures and branch closures. An ultra cynical ‘Rural Finance Summit’, a John Howard and John Anderson party trick after slashing rural services and ignoring bank predation, came and went in July 1996.
Santamaria noted that: ‘The impact of the KfW on the small and medium-sized business sector has been and remains enormous’. Nobody in authority paid any attention.
There is also the German agribusiness-oriented Landwirtschaftliche Rentenbank, created in 1949. The KfW and Rentenbank have AAA credit ratings, because government backed. Ironically, both banks have sought additional funding in Australia via ‘kangaroo bonds’. Too bad that Australian funds can’t go into comparable local institutions.
But what could Germany possibly offer us in terms of how to organise a vibrant economy?
Then there’s Canada, the country probably closest to Australia in terms of background and economic structure. Canada has the publicly-owned Business Development Bank of Canada. This bank started life in 1944 as the Industrial Development Bank, providing a huge filip to small business development in Canada.
And the US. The US has the Small Business Administration. The SBA doesn’t directly provide loans, but provides guarantees through commercial banks and offers other services that facilitate SME development.
I wrote a review in 2012 of a British book pushing ‘state-backed investment lending’ for Santamaria’s News Weekly here, which provides more detail.
But no, the Australian political class and its minders remain oblivious. The small business Ministry, for example, remains a PR stunt.
The Liberal Party cares not a jot for small business (save for buying it off with anti-worker legislation and tax cuts) and is positively disdainful towards the bush.
The Labor Party was itself created to support the battler and its programs often included concern for small business and the family farmer. After all, Labor established the Commonwealth Bank in 1911 and re-appropriated it for the broader public purpose in 1945. Its small business Industrial Finance Department, established in 1945 (later incorporated as part of the CDB), turned out to be a winner.
All that changed with Keating. Labor has since shown occasional flashes of conscience, but its stance generally lacks significant substance and conviction. Then Opposition Shadow Minister Clare O’Neil’s sterling work for victims during the Hayne Royal Commission has been rewarded by her being denied that position in the post-election Shadow Ministry.
As for the National Party, it deserves nothing but contempt. It will not go near the banks’ pernicious stranglehold over family farmer and rural SME borrowers.
I wrote an op-ed on the killing off of the Commonwealth Development Bank in the Canberra Times in 2001. That article, alas, also made no waves in the Capital.
Given that the article is not available on the web, it is reproduced below.
A sorry saga of reform off the rails
6 August 2001
The 1990s have been good for bank shareholders. But deregulation and privatisation have also brought bank practices incompatible with the broader public interest, compounded by incompetence and malpractice.
The July 23 Four Corners program on Commonwealth Bank loans and Liberal Party shenanigans exposed questionable practices, but obscured the context in which those practices arose. Borrowers from the Commonwealth Development Bank are representative of allegations of bank impropriety. It is instructive to delve into the history of this institution as it embodies a renewed bastardry that decades of banking reform had made a distant memory.
On the National Party's Web site, the Commonwealth Development Bank (with the Reserve Bank) heads the party's "Proud Record of Achievement" list.
This is half-right. The Labor Party created the Commonwealth Bank, out of which it moulded a Central Bank in 1945 and two specialist lenders to farmers and small business in 1943 [Mortgage Bank Department] and 1945 [Industrial Finance Department]. The Country Party plucked these two lenders out of obscurity and forged the Commonwealth Development Bank, which began business in January 1960 [at the time that the central banking and commercial roles of the Commonwealth Bank were split into the Reserve Bank and the Commonwealth Banking Corporation respectively]. Fortunately, the acceptance of the Development Bank became bipartisan. The CDB became a significant specialist lender, with $2.5 billion in assets and $300 million capital by June 1991.
The survival and success of the CDB in an adverse finance sector culture is of enormous significance in Australian economic history. The bank, through the skills of its specialist staff, lent to farmers and businesses that the other banks wouldn't touch. There was flexibility in loan arrangements during hard times. In spite of its "marginal" portfolio, the bank managed to return a consistent and increasing profit.
By the late 1980s, the broad environment had taken a marked turn for the worse. Economically, high interest rates, the "recession we had to have", crisis in the wool industry, and drought brought hard times.
Politically, the Labor Government had turned pragmatically to asset privatisation as a panacea for Budget deficits. The first segment of the Commonwealth Bank was privatised in mid-1991. The Development Bank was cynically made a subsidiary of the Commonwealth Bank in February 1991 to boost the Commonwealth Bank's assets.
Ideologically, the notion that comprehensive financial deregulation was inevitable and universally beneficial had taken hold across a wide spectrum of decision-makers. The 1980 Campbell committee report had set the tone. This report asserted, wrongly, that there would be no role for specialist lenders after a full regime of "competition" had replaced the then regulatory structure.
Within the Commonwealth Bank itself, a new regime was in the ascendant that welcomed privatisation. The CDB was seen as an unwelcome accessory to a glorious commercial future. The representation of the Development Bank in the parent bank's annual reports shifted from a celebration of new loan approvals to hand-wringing about the CDB's viability without government subsidy.
Unexpectedly, the Keating Labor Government came to the rescue in trying to atone for the shocking recession and appear respectable for the 1993 election. Support for small business saw the Government offer a capital injection for the CDB of $30 million and an annual subsidy of $20 million. This acted to stabilise total CDB lending, and rural lending expanded in 1995.
But what the Lord giveth He taketh away. On the spur of the moment, Keating decided that the remaining 50 per cent of the Commonwealth Bank would be sold to make the 1995-96 Budget figures look prettier.
In the ensuing debate on the Sale Bill in the House in October 1995, the Coalition made telling complaints about the adverse effects for the CDB. Yet in the debate in the Senate in November, Coalition senators were adamant that the Commonwealth Bank should be fully privatised. They declined to develop a compromise with the minor parties that would have seen the CDB quarantined against the effects of privatisation.
After the Coalition victory in March 1996, Treasurer Costello reported on June 4 that the Government was abolishing the special arrangement for the CDB, selling its equity interest (the $30 million) at a discount, and ceasing any further subsidy. The specialist charter would not apply to new business from July 1. Costello said, "This is consistent with the commercial approach to business which the fully privatised Commonwealth Bank will pursue." Nevertheless, Costello promised that the CDB would be promoted as a "flagship rural enterprise" to provide financing more aggressively for the rural sector.
In the Land newspaper on June 13, Russ Weaver, the CDB's general manager since 1994, was quoted as saying that "the bank's lending policies would remain largely unchanged post-July 1, with approvals continuing to be determined by applicant viability".
In Parliament on June 18, Tim Fischer made a garbled reply to a question to the effect that past loan arrangements would continue.
On July 1, the CDB was effectively abolished, with the cessation of new business. So much for the 'flagship rural enterprise'. The CDB lending approach was not carried over into Commonwealth Bank rural lending. Some CDB borrowers were taken over on normal commercial terms; others have been, at best, barely tolerated until their contracts run out.
The dismantling of the CDB's culture preceded 1996. Beginning in 1994, the Commonwealth Bank arbitrarily changed the terms of the relationship with some CDB clients, imposing austere and erratic criteria on borrowers who had contracted to the Development Bank on other terms.
As a result of the changed terms, some farmers and businesses have been forced to truncate viable operations and sell off property at less than market value. The three major political parties all played a part in the demise of the CDB, and it behoves the National Party to adjust its Web site to that effect. In the face of political indifference, the death of the Commonwealth Development Bank marks a bleak signpost for an intelligent and equitable provision of finance in the future.