Four pillars or four pillows? Banking’s comfy collective

The big four banks, ANZ, CommBank, NAB and Westpac, are not legally prevented from merging, but the four pillars policy has stood in the way. xcode/Flickr

Australia’s four pillars policy is widely misunderstood. At heart, it is an anti-bank policy, one which prohibits the large banks from doing what they might like to do and that is to merge. It stops them getting bigger by swallowing one another.

The policy dates back to the late eighties when Paul Keating blocked the proposed merger between ANZ and the large insurer National Mutual Life Assurance. The “six pillar” policy announced by Keating prohibited mergers amongst the four largest banks and the two largest life insurers.

This was a reversal of a long standing policy whereby the Reserve Bank of Australia had consistently waved through mergers and encouraged consolidation in the financial sector. For example, economic historian Boris Schedvin, in his 1992 book on Australia’s central bank wrote:

The [Reserve] Bank’s assessment of the [merger] proposals … was that the sharp increases in concentration conferred benefits on the system and in other respects was largely benign.

The Wallis Report in 1997 suggested the “six pillar policy” was misplaced, and that there was no particular justification for the policy. Treasurer Costello rejected the broad thrust of the recommendation but relented to the extent that he allowed the life insurers to merge between themselves or with banks, subject to normal ACCC review. He did however reiterate his determination not to allow mergers between any of the big four banks, hence the “four pillars” policy.

By itself the policy (which is not embodied in law) does not protect the banks from being taken over by foreign banks, or even other Australian companies. It provides no protection to the banks, except from each other. The treasurer has the legal right to stop the takeover of any of the large banks by a foreign institution but not through the “four pillars” policy.

And it is not an empty restriction. There have been reports from time to time about pushes for mergers. In the late 2000s when NAB was not doing well, there were stories in the press about a move for the Melbourne-based banks, NAB and ANZ, to merge.

This raises the broader question of whether the policy is a good policy.

Why stop bank mergers?

Banking is an industry characterised by strong economies of scale. Allowing banks to merge is likely to generate greater efficiency and lower costs. This would normally be good for the economy and hence to be encouraged. Such benefits provide a clear incentive for banks to seek to overturn the policy, given it restricts their ability to achieve the economies of scale benefits.

The arguments against allowing such mergers are less clear. One concern has been that if the Melbourne banks merged, then the Sydney banks would do so as well, reducing the system from four big banks to two. The inference is that in a much more concentrated banking system the benefits from the larger scale may not be passed on to consumers.

Former Commonwealth Bank chief, and now Financial System Inquiry chair David Murray has thrown his support behind the four pillars policy. Dean Lewins/AAP

Since the financial crisis, a period in which many banks globally failed and were merged into other entities, there has been a concern that maintaining greater diversity of supply gives policymakers greater scope to manage risks. This concern, about maintaining a diversity of supply of financial services, possibly for prudential reasons, but more fundamentally to maintain a broad offering of financial services, appears to lie at the heart of the policy.

For the economy it probably does not make a lot of difference. The large banks already reap considerable economies of scale and continue to grow, which should enable them to continue to do so. The long term decline in bank margins, and the decline in fixed charges per unit of assets the banks fund, suggests many of the benefits are flowing through to customers. It is difficult to see politicians changing a system which is moving in the direction of generating efficiencies and sharing them between shareholders and consumers, which is why it is unlikely to be a priority issue for the Murray inquiry into the financial system.

What does seem clear is that ANZ, CBA, NAB and Westpac provide four very comfortable pillows for the regulators and the politicians to rest on - it is in essence a “four pillows” policy.