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Bank stocks rally after the release of the Banking Royal Commission’s interim report

The share prices of our largest financial institutions have surged after the release of the interim report from the Hayne Royal Commission this afternoon.

The share price of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) rallied between 1% and 2% at the time of writing.

This is the relief rally that bank stock supporters have been waiting for as Commissioner Kenneth Hayne saved his most damning criticism for the market regulator, the Australian Securities and Investments Commission (ASIC).

While the interim report acknowledged that the banks, including AMP Limited (ASX: AMP), have put profits before people, it was highly critical of the inaction from ASIC as the industry’s policeman seemed more interested in giving the financial institutions a slap on the wrist instead of taking them to court.

There’s no doubt that the banks have acted badly but blaming them is like blaming a spoilt child for bad behaviour instead of looking at the parents for answers.

If you wanted to know where the banks’ bad culture has come from, it was nurtured by ASIC as the regulator has too often looked the other way.

There is one thing you can always count on – and that’s for people to always act in their own self-interest. This is why we shouldn’t be surprised at the banks’ bad behaviour and it explains why self-regulation seldom works.

However, the relief rally in the sector may be a little premature (although understandable as the shares of the big four plus AMP have been significantly de-rated) as the interim report made no specific recommendation on how to prevent a repeat of bad behaviour in the sector.

That will come in the final report to be issued next year.

What is likely though are tougher penalties, more stringent compliance for institutions and easier channels for consumers to lodge complaints against these companies.

This means there will be no way for AMP and our banks to escape a lower profit growth environment given that their earnings growth had received a material uplift from unscrupulous and aggressive practices.

This is even before we consider the added compliance cost, class action lawsuits, higher rates for bank funding, increases in bank provisioning and a falling property market that could remain in the doldrums till 2020.

Having said that, the time to buy the banks may not be far off. If the October reporting season is more benign than expected, and the fall in house prices starts to slow, that will be an indicator for me to become more upbeat on the sector.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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