tag:theconversation.com,2011:/id/topics/four-pillars-policy-9016/articlesfour pillars policy – The Conversation2018-11-18T18:50:22Ztag:theconversation.com,2011:article/1063392018-11-18T18:50:22Z2018-11-18T18:50:22ZThe royal commission is about to grill the chiefs of the big four banks. Here’s why soon they mightn’t exist<figure><img src="https://images.theconversation.com/files/245905/original/file-20181116-194494-mvz3fo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">First up before the Royal Commission on Monday will be the chief executive of the Commonwealth Bank. The era of the big four banks might be ending.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>It will be worth watching the <a href="https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-7-hearings.aspx">final round of hearings</a> at the banking royal commission, which begin on Monday. The chief executives of each of the big four will be recalled for reexaminations.</p>
<p>It might be the final time they appear in the same room. It might even be the last time there’s even such a thing as the big four.</p>
<p>Not only are the so-called four pillars under attack from the <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">Commissioner Kenneth Hayne</a>, but there are also enormous economic and technological pressures that are already beginning to undermine their <a href="https://www.theguardian.com/australia-news/2018/aug/03/banking-industry-found-to-be-an-oligopoly-that-exploits-its-customers">special status</a>.</p>
<p>Together, these pressures have the potential to radically change the banking landscape over the coming decades and bring an end to the <a href="https://www.abc.net.au/news/2018-02-07/productivity-commission-warns-four-pillars-banking-policy-ad-hoc/9402742">Four Pillars policy</a> under which Westpac, the Commonwealth, the ANZ and the National Australia Bank have been effectively protected from takeover and prevented from merging.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/four-pillars-or-four-pillows-bankings-comfy-collective-23297">Four pillars or four pillows? Banking's comfy collective</a>
</strong>
</em>
</p>
<hr>
<p>Although never a formal law, the understanding that none of the big four can merge has been an accepted rule in Australian business since the late 1980s, when the then treasurer Paul Keating <a href="https://theconversation.com/four-pillars-or-four-pillows-bankings-comfy-collective-23297">made it clear he would block takeovers</a>.</p>
<h2>Eggs in one basket</h2>
<p>Since then the big four banks have changed in two important, but related, ways. </p>
<p>Over the past few years they have retreated from their overseas banking ventures, largely divesting themselves of their <a href="https://theconversation.com/national-australia-bank-30-years-of-strategy-failure-55159">sometimes ill-judged</a> foreign acquisitions. </p>
<p>And they have recently <a href="https://www.smh.com.au/money/super-and-retirement/spin-off-of-big-banks-wealth-arms-heralds-a-new-era-20180622-p4zn4m.html">sold off</a> most of their local wealth management (insurance and investment) subsidiaries.</p>
<p>These divestments mean we are left with four enormous retail-oriented banks that dominate both the banking system (with <a href="http://fsi.gov.au/publications/interim-report/02-competition/banking-sector/">almost 80% of banking assets</a>) and the stock market (four of the top six companies on the <a href="https://au.spindices.com/indices/equity/sp-asx-200">S&P/ASX 200</a>). </p>
<p>Their profitability is heavily dependent on lending for housing, which in turn is heavily dependent on the housing market. </p>
<p>That market is already <a href="https://www.abc.net.au/news/2018-10-23/house-prices-falling-as-interest-rates-wage-growth-move/10418278">beginning to contract</a>, meaning the big four are going to find it increasingly hard to maintain their stellar profits.</p>
<h2>No longer unique</h2>
<p>What’s more, the near monopoly they have had on processing payments is under threat.</p>
<p>In Britain around 1,000 bank branches are closing per year in the wake of a technologicial revolution that makes it possible to process payments away from branches and away from banks. The rate of these closures <a href="https://www.express.co.uk/news/uk/1008239/half-of-bank-branches-will-shut-says-boss">is climbing</a>.</p>
<p>Mobile banking means that many basic transactions that used to require a visit to a branch can be done online. Australia’s <a href="https://www.nppa.com.au/the-platform/frequently-asked-questions/%22%22">New Payments Platform</a> means that payments to people such as tradies can be made anywhere, any time, in real time and at minimal cost. Use of the platform <a href="https://www.nppa.com.au/the-platform/who-is-involved/">isn’t limited to the big four</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-new-payments-platform-may-mean-faster-transactions-but-it-wont-be-safer-91565">The New Payments Platform may mean faster transactions, but it won't be safer</a>
</strong>
</em>
</p>
<hr>
<p>The Reserve Bank <a href="https://www.rba.gov.au/speeches/2018/pdf/sp-so-2018-10-03.pdf">reports</a> that after only eight months of operation the number of payments on the platform already exceeds the number of cheques.</p>
<h2>Too many branches</h2>
<p>Compared with other countries, we have a lot of bank branches.</p>
<p>Australian banks <a href="https://australia.deposits.org/banks.html">operate</a> more than 5,000 branches, most of them owned by the big four, as well as 30,000 automatic teller machines, and more than 900,000 <a href="https://www.auspaynet.com.au/resources/device-statistics">EFTPOS</a> terminals at supermarkets and Post Offices. </p>
<p>In the United States, just one bank, the <a href="https://newsroom.bankofamerica.com/companyoverview">Bank of America</a>, has 67 million customers.</p>
<p>Here more than 140 banks (technically, <a href="https://www.apra.gov.au/sites/default/files/documents/qadip_june_2018_full.pdf">authorised deposit-taking institutions</a> compete to serve a population of just 25 million.</p>
<p>Inevitably at least one of the big four will come under pressure to fold, be taken over, or merge with one of the others.</p>
<h2>Vanishing support</h2>
<p>The four pillars policy is “aimed at ensuring that whatever other consolidations occur in retail banking, <a href="https://www.pc.gov.au/inquiries/completed/financial-system/report/financial-system-overview.pdf">the four major banks will remain separate</a>”.</p>
<p>In 1997, the Wallis Financial Systems Inquiry <a href="https://www.accc.gov.au/media-release/wallis-sets-future-financial-system-direction">recommended</a> it be scrapped. </p>
<p>On the other hand, the 2014 Murray Inquiry into financial services <a href="https://www.theaustralian.com.au/inquiry-chair-david-murray-backs-four-pillars-policy/news-story/a2908a6797fde05d0ed81174fbc47722">recommended</a> that the policy be retained.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/factcheck-do-bank-profits-belong-to-everyday-australians-88156">FactCheck: do bank profits 'belong to everyday Australians'?</a>
</strong>
</em>
</p>
<hr>
<p>But the Murray inquiry, probably due to its narrow terms of reference, found little of the egregious misconduct that has been uncovered by the royal commission. This calls into question the inquiry’s conclusion that there is adequate competition in the banking system. </p>
<p>Indeed, this conclusion was rejected in a <a href="https://www.pc.gov.au/inquiries/completed/financial-system/report">recent Productivity Commission report</a>, which stated bluntly that “the Four Pillars policy is a redundant convention”.</p>
<h2>An end in sight</h2>
<p>The end of the four pillars policy needn’t mean the end of competition. Smaller, cheaper competitors will be doing more of what the big four did.</p>
<p>A shakeout of bank branches is long overdue, however painful that may be in many small towns, where despite the serious problems raised at the royal commission, a bank branch is still an important part of the community.</p>
<p>Undoubtedly, such a major disruption, unless managed carefully, will be harrowing for many customers and staff.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-tip-for-bankers-ahead-of-the-royal-commission-be-more-like-doctors-106927">A tip for bankers ahead of the royal commission: be more like doctors</a>
</strong>
</em>
</p>
<hr>
<p>But for the long-term stability of the economy, it is incumbent on governments to address the inevitability of a smaller, more technologically driven banking system – one that hopefully, after the royal commission, will operate ethically for the benefit of customers.</p><img src="https://counter.theconversation.com/content/106339/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The economic underpinnings of the longstanding ‘four pillars’ policy are crumbling. Soon there may no longer be four big banks.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/483232015-10-12T00:08:28Z2015-10-12T00:08:28ZBoring and protected: fifth pillar needed to get Australian bank customers moving<figure><img src="https://images.theconversation.com/files/96877/original/image-20151001-5819-1yzyuwa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The snail's pace of switching between Australian banks deserves attention.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Australia’s four pillars banking policy was originally intended to preserve competition in financial services by maintaining separation of the main players. Today, that policy provides them a comfort zone and a government guarantee. It’s not simply a playing field that needs levelling – the four major banks own centre court and the other players are consigned to court 16.</p>
<p>The health of this very large industry is crucial for GDP and employment. It is also essential for prosperity since it enables productive businesses and household wellbeing. But the “steady as she goes” policy is suppressing competitive rivalry that would benefit consumers.</p>
<p>It’s not enough to fall back on the defensive argument that the industry weathered the GFC. The pillars’ combined market share is so large that their <a href="http://www.imf.org/external/pubs/ft/scr/2012/cr12308.pdf">homogenous business models</a> define the industry. Consumers can <a href="http://roymorgan.com/findings/5875-bank-customer-satisfaction-reaches-new-record-201410202220">hardly distinguish between them</a> for ho-hum customer service and low levels of innovation.</p>
<h2>Policy failure</h2>
<p>Federal government policy still fails to answer the hardest question. Is competition in this market sufficient to engender prosperity?</p>
<p>Both rivalry between suppliers, and effective choice for buyers, are essential for a well functioning market. Rivalry leads to diverse business models and a variety of product/price choices for consumers. Effective choice shows up in switching away from unsatisfactory suppliers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/96875/original/image-20151001-5798-syz927.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">They might look a little different, but Australians perceive them as all the same.</span>
<span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>UK experience</h2>
<p>In 2014 the UK Competition and Markets Authority looked at the market for personal current accounts. Its <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/371407/Decision-MIR-Final_14.pdf">first look</a> found a relatively concentrated supply side and some evidence of poorer service, but low levels of switching. Providers with better customer satisfaction ratings were not able to gain ground. All in all, they found “not what one would expect in a well functioning market”.</p>
<p>Running that ruler over the market for loans to Australian households gives a remarkably similar result. It’s quite concentrated, the four pillars holding around 84%, after post-GFC acquisitions of next tier banks. Four pillars customers are <a href="http://roymorgan.com/findings/6428-smaller-banks-continue-to-lead-in-customer-satisfaction-201509022335">markedly less satisfied</a>, but there is little evidence of switching, which casts doubt on whether this is a well-functioning market. Consumers are not benefiting from competition between the four pillars and the possibility of a fifth pillar seems to have receded over the last decade, as shown in this graph.</p>
<h2>Loans to households in Australia - all banks, share by loan value</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=474&fit=crop&dpr=1 600w, https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=474&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=474&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=595&fit=crop&dpr=1 754w, https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=595&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/97158/original/image-20151005-29782-7c4368.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=595&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>It’s not for want of opportunity. As shown in the following graph, the market has grown by a factor of five. Over the period, growth so far exceeds CPI that it’s fair to assume at least three new dollars of loans are present for every one in 2002. Opportunity on that scale would usually see market share changes driven by the success of new competitors and extensive customer switching between competitors.</p>
<h2>Loans to households in Australia - all banks</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=474&fit=crop&dpr=1 600w, https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=474&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=474&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=595&fit=crop&dpr=1 754w, https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=595&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/97159/original/image-20151005-29772-pw4gfk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=595&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>That growth is one of the reasons Australian banks continued profitable operation despite the GFC. For example, <a href="http://www.bis.org/publ/arpdf/ar2014e.pdf">comparing pre-tax profits of banks in 15 countries</a> before, during and after the GFC, showed Australia was the clear leader of 11 advanced economies.</p>
<p>Strong growth and continuing profits show there was opportunity. But the risks and costs for consumers in <a href="https://theconversation.com/how-changing-our-bank-account-numbering-system-will-be-a-win-for-customers-40236">switching are a barrier</a> when the vast majority of the market is perceived as no better than each other. This is very like mobile telephony before mobile number portability was mandated by competition policy.</p>
<p>If customer switching had operated freely during that growth, there’s a good chance Australia could now have five competitors in the “major” category. But in 2014, two dozen banks together made up a dollar value equivalent to the chunk held by the smallest pillar in 2002. How different competition would look with a strong fifth pillar grown out of one of the non-pillars back then, or one of the new entrants since.</p>
<h2>No competition test</h2>
<p>In Australia, there is no testing competitive intensity until a merger is proposed to the ACCC. Then the possibility of substantially lessening competition through that merger is evaluated. This reactive analysis is insufficient to answer the proactive question: Would Australia benefit from greater competition in financial services that policy change could engender?</p>
<p>We still don’t know, because disinterest arises from orthodox banking policy’s zero sum game between stability and competition. The conventional wisdom is that policy makers must favour one or the other. Contemporary theory and empirical evidence are <a href="http://www.clmr.unsw.edu.au/resource/competition-law-%26-policy/the-nature-of-competition-in-australian-retail-banking">rather more ambivalent</a>. This demands a proactive and critical evaluation of policy options based on nuanced understanding of Australian markets.</p>
<p>Without policy or regulatory focus on how much competition is enough, Australia may cede the chance for a fifth pillar of some kind, along with the consumer benefits of more robust rivalry.</p><img src="https://counter.theconversation.com/content/48323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls received funding from the Centre for International Finance and Regulation. He is a member of the ALP.</span></em></p><p class="fine-print"><em><span>Carolyn Evans received funding from the Centre for International Finance and Regulation and holds an Australian Postgraduate Award scholarship for her PhD research. She is not a member of any political party, nor does she work for, consult with or own shares in any company or organisation that would benefit from this article. </span></em></p>More robust competition between banks would benefit consumers, but there’s little policy focus on the issue.Rob Nicholls, Lecturer, UNSW SydneyCarolyn M Evans, PhD candidate, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/282502014-06-20T05:44:36Z2014-06-20T05:44:36ZWhy we needn’t fear the end of the Four Pillars policy<figure><img src="https://images.theconversation.com/files/51735/original/v4dpkcjq-1403241545.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Further global deregulation of banking might present future opportunities.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Revelations by whistleblower organisation Wikileaks of secret global negotiations to further deregulate global financial services, has led to speculation that such pact could signal the end of Australia’s “Four Pillars” banking policy.</p>
<p>According to <a href="http://www.smh.com.au/federal-politics/political-news/secret-trade-negotiations-is-this-the-end-of-the-big-four-20140619-3ah39.html">Fairfax today</a>, Wikileaks has obtained a draft text of <a href="https://wikileaks.org/tisa-financial/">secret Trade in Services Agreement (TiSA) negotiations</a> involving World Trade Organisation (WTO) member countries including Australia, the United States, and European Union countries.</p>
<p>According to Wikileaks’ press release:</p>
<blockquote>
<p>The draft Financial Services Annex sets rules which would assist the expansion of financial multi-nationals – mainly headquartered in New York, London, Paris and Frankfurt – into other nations by preventing regulatory barriers. The leaked draft also shows that the US is particularly keen on boosting cross-border data flow, which would allow uninhibited exchange of personal and financial data.</p>
</blockquote>
<p>The idea that the Government is negotiating to make it easier for Australian banks and other service companies to expand offshore provides lots of upside.</p>
<p>The finance sector - particularly banking - has been highly protected in many markets. This has been a real problem for Australian companies, since it has been difficult for them to get licences to operate in many markets – such as India, China, Malaysia or Vietnam – and their activities are often highly restricted even when they have a licence to operate, as in Indonesia.</p>
<p>Since Australia already has over 100 banks operating in the local market under rules which do not discriminate by nationality, we have little to fear from allowing greater freedom of operations in financial services.</p>
<p>However, as the media has been quick to pick up, greater access could allow for a foreign institution to buy one of our four major banks. While this is highly improbable in the short run, because our banks are very expensive by global standards, it could pose two sorts of problems in the future.</p>
<p>The less interesting is the regulatory concern. Countries like New Zealand already operate with most of the banking sector foreign-owned with few problems. The banks are required to operate as if they were standalone businesses, with separate capital etc, and regulated on that basis. There are still some issues about how privacy and data security are handled but the alternatives are reasonably clear and political decisions need to be made. In that sense and with such tight regulation, ownership does not matter. </p>
<p>The more interesting issue is how the Four Pillars policy might function if a foreign institution tried to buy, say, ANZ. Remember that the policy’s intent is to stop any of the large four Australian banks from buying any other one, and that it is only a policy and not a legislated restriction. </p>
<p>Treasurer Joe Hockey is able to enforce it because he has a legislated right to decide whether to allow any party to take more than 15% of the voting rights in a financial sector company (any company, not just a Big Four bank).</p>
<p>Imagine a large Chinese bank approaching the Treasurer asking to be allowed to acquire ANZ. It would have to do this as part of the approval process for the purchase of more than 15% of a bank. Subject to all the normal regulatory issues, the Treasurer of the day just has to make a choice as to whether the acquisition is in the national interest. </p>
<p>It is not a Four Pillars issue since after the acquisition there would still be four large banks (and more than 150 other deposit taking institutions). The Treasurer of the day might decide to allow this or to veto the acquisition.</p>
<p>Assume the Chinese bank is granted permission to purchase ANZ but then the CBA says that it too would like to buy the ANZ. The Four Pillars policy is designed specifically to stop this sort of consolidation of the major banks, moving from four to three in this case. One wonders how the politics might work out; would an Australian Treasurer really say yes to the Chinese offer and refuse to allow an Australian bank like the CBA to bid? One can imagine the outcry. </p>
<p>Of course if CBA bought ANZ, one can imagine that Westpac would be in the Treasurer’s office the next day asking for permission to buy or merge with NAB. The fascinating question is thus whether a bid by a foreign bank to buy one of the Australian majors would lead to the whole Four Pillars policy unravelling. </p>
<p>Given this sequence of possibilities, it seems likely the Treasurer would veto the acquisition of a major bank by a foreign institution.</p><img src="https://counter.theconversation.com/content/28250/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock consults from time to time for different financial sector institutions. He has a research grant from the Centre for International Financial Regulation for research on competition and regulation in finance.</span></em></p>Revelations by whistleblower organisation Wikileaks of secret global negotiations to further deregulate global financial services, has led to speculation that such pact could signal the end of Australia’s…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/232972014-02-17T19:44:16Z2014-02-17T19:44:16ZFour pillars or four pillows? Banking’s comfy collective<figure><img src="https://images.theconversation.com/files/41647/original/s9hqjq44-1392601021.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">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.</span> <span class="attribution"><span class="source">xcode/Flickr</span></span></figcaption></figure><p>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.</p>
<p>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.</p>
<p>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:</p>
<blockquote>
<p>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.</p>
</blockquote>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>This raises the broader question of whether the policy is a good policy.</p>
<h2>Why stop bank mergers?</h2>
<p>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.</p>
<p>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.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=906&fit=crop&dpr=1 600w, https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=906&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=906&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1138&fit=crop&dpr=1 754w, https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1138&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/41649/original/qz6cpv66-1392601305.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1138&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Commonwealth Bank chief, and now Financial System Inquiry chair David Murray has thrown his support behind the four pillars policy.</span>
<span class="attribution"><span class="source">Dean Lewins/AAP</span></span>
</figcaption>
</figure>
<p>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.</p>
<p>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 <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2013/financial-system-inquiry-tor">inquiry into the financial system</a>.</p>
<p>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.</p><img src="https://counter.theconversation.com/content/23297/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock consults to various financial sector bodies, has a research grant from the Centre for International Finance and Regulation, and intends to submit his views to the Murray Inquiry. He does not own any direct shares in any company mentioned although the superannuation fund of which he is a member certainly does.
</span></em></p>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…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.