Why we needn’t fear the end of the Four Pillars policy

Further global deregulation of banking might present future opportunities. Image sourced from www.shutterstock.com

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.

According to Fairfax today, Wikileaks has obtained a draft text of secret Trade in Services Agreement (TiSA) negotiations involving World Trade Organisation (WTO) member countries including Australia, the United States, and European Union countries.

According to Wikileaks’ press release:

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

Given this sequence of possibilities, it seems likely the Treasurer would veto the acquisition of a major bank by a foreign institution.