The GFC killed competition to the big four banks
With a growing feeling that the worst of the global financial crisis may be behind us, it’s a good time to have a look at the competition landscape in our banking sector.
Sadly for consumers it not a pretty sight as in just under 2 years we have seen the 4 major banks dramatically and significantly increase their dominance in the sector to the detriment of consumers.
The Commonwealth Bank and Westpac, in particular, have shot in front of the NAB and ANZ to leave them and the smaller regional banks well and truly behind in the race to dominate Australia’s banking sector. Is the increased dominance of the Commonwealth Bank and Westpac something to be pleased about?
Of course not, if you are concerned about consumers being gouged by the big boys. Banks, especially the 4 majors, are certainly not charities. They are there to make a profit. Nothing wrong with being profitable or strong enough to weather the global financial crisis.
At some point, however, profit-making becomes profiteering and that’s when we should be concerned for consumers and the economy generally.
When does profiteering to the detriment of consumers start to set in? Well, that occurs when the level of real competition in the market weakens or fails to constrain the price gouging tendencies or opportunities of the dominant businesses, or in this case, the 4 major banks.
Indeed, at some point the dominant businesses have become so large that they can push up prices and inflate profits at will. We can already see that with respect to the 4 major banks. Collectively, they control around 86% of the bank home lending market and around 77% of total bank deposits. Individually, they have increased fees and have been able to increase their interest margins.
The 4 majors have failed to fully pass onto customers cuts in official interest rates during the past year and have been quick to raise interest rates recently ahead of expected future Reserve Bank increases.
Of course, the 4 major banks and their apologists have pointed to the global financial crisis to try and justify the need to prop up the major banks. Yes, there has been a global financial crisis, but let’s not forget that Australia’s economy and banks have been much more resilient to the crisis than in other parts of the world.
Let’s also not forget that Australia has one of strongest prudential regulatory frameworks anywhere in the world and that fact alone serves as a timely reminder that effective regulatory frameworks are always critical in protecting consumers and correcting market failures.
While our strong prudential regulatory framework has ensured that all our banks, both big and small, have been in a much better position to weather the financial crisis, our competition law framework has unfortunately let consumers down very badly.
In fact, our present competition law framework has a weak law against anti-competitive mergers that currently allows the ACCC to approve around 97% of mergers that the ACCC considers.
With that number of mergers being approved by the ACCC it’s no wonder that we have some of the most highly concentrated markets in the world.
That applies to banks also with the ACCC having approved a long line of mergers in the last few years that has allowed the 4 major banks to substantially increase their dominance during that time.
Take the Commonwealth Bank for example. The ACCC approved its takeover of BankWest and allowed it to take stakes in Aussie Home Loans and Wizard. In relation to Westpac, the ACCC approved the takeover of St George and RAMS Home Loans.
When taken together it’s painfully obvious that the Commonwealth Bank and Westpac were allowed by both the ACCC and our weak competition laws to take out two of the most vigorous banking competitors to the major banks, as well as the key non-bank mortgage providers that had kept the majors on their toes in the home lending market.
No wonder the ACCC has publicly expressed “regret” and “concern” about the increased dominance of the 4 major banks, especially following the BankWest takeover.
Yes, the ACCC has said that its hands were tied because of the difficult financial position faced by BankWest’s UK parent, but let’s not forget that the UK Government was in the process of bailing out the UK parent and its new owner.
Overstating the need for takeovers is a favourite pastime of those big businesses and their advisers who want all mergers to get through. It’s critical, therefore, that such self-interested statements are appropriately discounted or even dismissed where detrimental to consumers.
We always need to be vigilant that the global financial crisis doesn’t become a cloak to mask the competition crisis we are increasingly facing in this country.
Dangerously, weak competition laws allow mergers to get through despite ultimately being detrimental to competition and consumers because of higher prices that follow the mergers.
Expressions of “regret” need to be backed up by action. The ACCC needs to act rather than watch and if it is truly regretful of the BankWest takeover then it should apply to the Federal Court for a finding that the takeover was a breach of our competition laws and that the Court should order the Commonwealth Bank to put it up for sale.
Failing such decisive action from the ACCC, it’s time that the Federal Government enacted strong competition laws to prevent any further reduction in real competition.
We need strong competition laws that require greater scrutiny of mergers and which require decisive action to stop the ever growing number of mergers that are so detrimental to consumers in such highly concentrated markets as banks, groceries and petrol.
All this needs to be backed up with the enactment of a general divestiture power modelled on United States and United Kingdom laws that would enable the ACCC to seek a Court order to break up companies that repeatedly breach competition laws or which behave in a way that distorts or restricts competition to the detriment of consumers.
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