The oxymoron that is banking competition

Neelie Kroes, Europe’s Competition Commissioner, wants to break up the banks. ING has read the wind and has complied. Bank of England Governor, Mervyn King, wants to do the same. Paul Volcker, ex Federal Reserve Chairman, likewise.

In Australia, the trend is in the opposite direction. The big four banks, as allfinanz conglomerates, are at the core of the entire economy - courtesy of the regulatory and political establishment.

When the Campbell Inquiry into the finance sector reported in 1981, it promised a utopian environment for all through liberating the competitive impulse from the then purported regulatory distortions.

Curiously, the Committee didn't explain what it meant by “competition”. The populace thinks that competition means “the more banks, the better” or, at least, survival of the fittest. The establishment thinks that competition means the survival of the most powerful.

The banks took pre-emptive action. The ANZ Bank had been three separate banks (ANZ, ESA, Adelaide) a decade previously. In 1981, the Melbourne-based National Bank acquired the Commercial Banking Company of Sydney, and the Bank of New South Wales (now Westpac) acquired the Melbourne-based Commercial Bank of Australia. Both takeovers were facilitated because the mergers provision of the Trade Practices Act (section 50) had been gutted by John Howard in 1978 as then Minister for Business and Consumer Affairs.

In 1985, Treasurer Paul Keating issued 16 licenses for bank entry into Australia. The sizeable entrants all found entry into retail and small business banking hampered by the expenses of duplicating the then extensive branch network. Most of the entrants declined the prospect and the few who did were burnt.

Thus by 1990 the big four held two-thirds of deposit-taking institutional assets in Australia. From this advantage followed an orgy of intemperate lending. Veteran journalist Trevor Sykes estimated that, to mid-1993, the big four had written off $16.3 billion in bad debts out of a sector total of $28.5 billion.

The then Labor Government, not least via a whitewash banking inquiry that sanitised the banks’ disastrous foray into foreign currency loans, gave the banks a generous “get out of jail” card.

Save for Keating’s 1990 “four pillars” policy preventing mutual takeovers, the only phenomenon countering the big four was the conversion of building societies into trading banks. But this second tier has been consistently weakened by the plundering of its ranks - in particular, Westpac's acquisition of Western Australia's Challenge Bank in 1995 and the Bank of Melbourne in 1997. These takeovers occurred under the normally cautious Chairman Allan Fels and after s.50 had been strengthened.

St George grew by acquiring its rival Advance Bank in 1997 - arguably a more defensible merger because of its “countervailing power” role.

The takeover in 2000 by the privatised Commonwealth Bank of Australia of the ex-insurance mutual turned bank, Colonial First State (having gobbled up a neutered State Bank of New South Wales), completed the grisly picture.

In August 2008 the Australian Competition and Consumer Commission approved the takeover by Australia's third largest full-service bank (Westpac) of Australia's fifth largest (St George). The assessment was a disgrace. The ACCC approved the CBA takeover of BankWest with an equally cynical assessment in December.

In small and medium enterprise (SME) lending in particular, St George was eating away at the undeserved big four dominance. The big four's treatment of their SME constituency has been peppered with bank staff incompetence, indifference and malpractice.

The regulators responsible for monitoring financial services unconscionability, successively the ACCC and (after March 2002) the Australian Securities and Investments Commission, have been recipients of perennial complaints from bank victims. Both regulators have declined to act on these complaints.

Given that regulatory redress of unconscionable conduct against SMEs is non-existent, the ACCC could have compensated by rejecting the St George takeover.

Labor Treasurer Wayne Swan approved the St George takeover on October 23, compounding the disgrace. Swan claimed that “this decision strikes the right balance between enhancing the competitiveness and the strength of our banking system”. No it doesn't. It is a mortal blow to competitiveness for the indefinite future.

The emphasis on stability is unwarranted. St George was not in trouble. If BankWest’s parent HBOS was in trouble, BankWest could have been delivered to a bank other than one of the big four.

Meanwhile, bank incautiousness during the boom has been complemented by bank bastardry during the crisis. They have scrambled to appropriate security over assets of failed companies whose flawed business models they had previously underwritten (Babcock & Brown, Opes Prime). They have forced companies to close plants (Pacific Brands) at short notice, and to divest assets at under value (OZMinerals, PaperlinX), to clean up their own fractured balance sheets. They have jettisoned the tawdry financial advisers and advisers’ clients that they previously underpinned (Storm Financial). They are starving their small business customers of credit.

The Rudd Government has chosen to define the “national interest” through entrenching the already formidable power of the big four within the Australian economy. The financial crisis has provided an ideal environment to facilitate the consolidating of banking.

A Sydney Morning Herald editorial of October 13 claimed that “a comprehensive stocktake of the competitive landscape of the banking sector is sorely needed”. The September Senate Report on bank mergers, initiated by Independent Senator Nick Xenophon, was a damp squib. Hell will freeze over before either major Party initiates a serious inquiry into the power and culture of the banking establishment.