Sit back and enjoy as the four banks gouge you
If it wasn’t enough that Australians consistently face some of the fastest growing food prices in the developed world as a result of the dominance of Coles and Woolworths, the major banks have decided to join the price gouging club.
With the Commonwealth Bank showing strong profit growth and Westpac announcing a profit upgrade, it’s clear the four major banks are some of most profitable in the world. Profitable banks are a good thing I hear you say. Yes, but profiteering banks are not a good thing for the economy and consumers. When does profitable become profiteering?
Simple. It’s when competition has diminished to a point where the four major banks can raise interest rates at will. It’s competition that keeps everyone honest and where that competition is removed the remaining players can price gouge. It doesn’t take an economics degree to work that out.
There is no doubt that the four major banks dominate the Australian banking sector. Allowing that to happen was a mistake and Australian consumers will pay dearly for that mistake. How did the 4 major banks come to have such a stranglehold over the sector? Again, simple. The Federal Treasurer and the ACCC allowed it to happen by not stopping the four major banks from so aggressively wiping out the competition.
Conveniently, perhaps too conveniently, the four major banks, the Federal Treasurer and the ACCC point to the global financial crisis. The only problem with that excuse is that numerous mergers and acquisitions that allowed the four major banks to become so dominant pre-date the global financial crisis. Over the years the Federal Treasurer and the ACCC allowed the regional banks to be picked off one by one. We have seen the Bank of Melbourne, Bank of South Australia, Challenge Bank taken oven. Then came Westpac’s takeover of St George, a takeover that was kicked off many months before the global financial crisis.
The four major banks were also spreading their tentacles to wealth management firms well before the global financial crisis. With all these mergers and acquisitions having been allowed to slip past the Federal Treasurer and the ACCC before the global financial crisis, it’s a bit disingenuous to try and hide behind the global financial crisis.
Of course, the majors have been very quick to use the global financial crisis to drive in the final nails in the coffin of competition. The majors moved quickly to remove BankWest and to neutralise those specialist non-bank home lenders that had given them such a hard time. The Commonwealth Bank and Westpac took stakes in Aussie Home Loans, Wizard and RAMS. These specialist non-bank home lenders had certainly been keeping the majors honest and there is no doubt that the majors celebrated the taming of these vigorous competitors.
With all those independent vigorous competitors so effectively neutralised by the majors over the years, it’s clear that something more fundamental has gone wrong with our competition laws. Indeed, it’s the failure of our anti-merger laws to stop the 4 major banks from getting such an overwhelming stranglehold that is now costing consumers so dearly. With the Commonwealth Bank already delivering higher profits off the back of higher interest margins and Westpac to follow suit, it’s clear that consumers are paying more in interest than they should as a result of the dominance of the 4 majors.
There is no doubt that the four major banks have been able to continue pushing up interest margins on loans because of the dramatic fall in banking competition in recent years. Allowing the 4 majors to take out vigorous competitors such as St George, BankWest and the various specialist home loan lenders was not only a mistake, but amply demonstrates that our competition laws are in urgent need of repair.
Our current anti-merger law is weak and has allowed the four major banks to eliminate strong independent competitors to the detriment of consumers. With the current anti-merger law allowing the ACCC to consistently approve around 97 per cent of mergers and acquisitions it’s obvious that far too many mergers and acquisitions are being allowed to get past our competition laws and the ACCC. Our weak competition laws mean that Australia has one of the most highly concentrated banking sectors in the developed world and that’s bad news for consumers.
With just four major banks being so powerful Australian consumers are now at the mercy of the 4 majors and the majors know it as they push up their net interest margins. Why the focus on net interest margins? Simple. With net interest margins a key measure of the competitive pressure on interest margins, a careful review of net interest margins becomes an excellent way to determine the level of competition in the banking sector. Indeed, as competition intensifies that puts downward pressure on net interest margins as consumers get better deals on interest rates. Dangerously for consumers, however, as the level of competition falls, net interest margins rise as consumers are forced to pay higher interest rates.
While consumers benefit from greater competition and falling net interest margins, consumers clearly suffer from a reduction in competition and rising net interest margins. Figures from the Reserve Bank show that as banking competition intensified between 2000-2008 with strong competition from St George, BankWest and the various specialist home loan lenders, the net interest margin of the four major banks fell. Conversely, as St George, BankWest and the various specialist home loan lenders were acquired by the majors around 2008, net interest margins of the majors started to rise and have continued to do so. This continued rise in net interest margins by the four majors has been confirmed with the Commonwealth Bank revealing a rise in their net interest margin during the past year.
Consumers deserve better and that’s why we not only need strong and effective anti-merger laws, but we also need the ACCC to lift its game and stop the four major banks from spreading their tentacles even further in the banking sector, as well as into the wealth management sector. Unless the dominance of the 4 majors is directly tackled by the Federal Government and the ACCC, consumers will continue to be price gouged by the four major banks.
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