When there is broadly based high level of confidence in how these relationships and transactions function, with professionalism and prudence, the economy generally runs like a well-oiled machine. Money is lent, savings accumulate and businesses invest and employ. When there is a crisis of confidence, when uncertainty increases about the veracity and functioning of the banking system, the wheels can quickly fall off the economy.
Which leads to the yet to be felt fall-out from the Royal Commission.
The blanket coverage of the evidence given so far, including on social media, is likely to cause some to have second thoughts about safety and effects of doing business with their bank. Banks share prices are sharply lower. But even if the effect is marginal, it will undermine credit growth and therefore spending and investment at a time when the economy is struggling to lift its performance.
Recent data on employment, retail sales, house prices, building activity, wages and inflation are all weak. Credit growth, which measures the growth in borrowing, is already showing signs of weakening.
In annual terms, the latest data shows that housing credit grew by 6.2 per cent, the weakest result since 2014. Personal borrowings are falling, down 1.1 per cent over the past year and they have been declining since 2015. Business borrowing, which is so vital for any upswing in business investment and job creation, is increasing by just 3.6 per cent which is well down from the 7 per cent growth rate seen in 2016.
Suffice to say, there is already evidence of a mix of soft economic activity and weak credit growth across the main sectors of the economy.
With the Royal Commission still having at least 8 months to have public hearing and the possibility this gets an extension, the run of disconcerting news and evidence is likely to continue for that time. The banks are likely to try to stay clean from now, not wanting to attract any further negative blow back while the Commission is hearing evidence and before the recommendations are forthcoming. This could see them further curtail their lending, for fear of writing bad loans at a time when the economy is just muddling along.
Suffice to say, one of the unintended consequences of the banking Royal Commission might be to drag the economy lower from an unimpressive starting point. When the RBA is signalling the next move in official interest rates is up and when household wealth is being eroded by falling house prices, this could end very badly.