Why do the big four banks rule? Go to the supermarket
With the 4 major banks pushing up interest rates at will and the Federal Treasurer, Wayne Swan, looking increasingly impotent when trying to bring them into line, it’s clear that competition in the banking sector is being killed off quickly and dramatically to the detriment of struggling Australian families.
So, what’s killing off competition in the banking sector?
Well, the answer is the same as to what’s killing off competition in groceries, liquor and petrol; just to name a few.
It’s the failure of our competition laws to stop the avalanche of mergers that are strangling real competition in key parts of the economy. This failure is allowing the corporate giants to buy out independents and other price competitive players to the detriment of consumers.
Allowing the 4 major banks to take out the smaller banks and wealth management businesses is a mistake and will cement the dominance of the 4 majors for years to come.
We should be stopping these acquisitions by the 4 major banks.
Why aren’t we? First of all, our competition laws are simply too weak. Yes, we have laws that outlaw mergers or acquisition that “substantially lessen competition,” but the requirement that the ACCC prove there’s going to be a “substantial lessening of competition” is just too hard a test to satisfy.
In practice, the current legislative test for trying to stop mergers is so hard to prove that the ACCC approves around 97% of mergers that it considers.
A 97% approval rate for mergers considered by the ACCC is just too high and explains why Australia has some of the most highly concentrated sectors in the world.
Of course, we hear strong protestations from the ACCC that it “closely” and “rigorously” reviews mergers and acquisitions, but such protestations mean little when the ACCC has to let through 97% of mergers because the current anti-merger test is just too onerous.
That current legislative anti-merger test requires that the ACCC prove that the merged entity would have the “power to raise prices without losing business” if the merger or acquisition was to take place. Only monopolists or near monopolists have the ability to raise prices without losing business.
Thus, the current anti-merger test will not stop a merger or acquisition in any market where there are at least two or three other players left to “compete” with the merged entity.
In the banking sector, the current anti-merger test has allowed the 4 major banks to take out St George, BankWest, RAMS, and a range of other non-bank financial institutions and wealth management businesses. And that’s just in the last couple of years!
On each occasion the ACCC has allowed the merger or acquisition to take place on the basis that the ACCC didn’t consider the current anti-merger test to have been breached as there would still be 4 major banks left to “compete” with one another.
For the ACCC policing the current anti-merger law it’s simply a question of whether the merged entity would be operating in a market where there are other players left. If so, then the merger or acquisition would be allowed by the ACCC under the current anti-merger test.
The problem with this approach, however, is that simply relying on the 4 major banks to “compete” is not enough to keep them honest. The reality is that where you are left with similarly sized players in a highly concentrated market, the players will inevitably act as a “cosy club.”
In practice, the 4 major banks just shadow one another on interest rates and fees. Naturally, there will be the odd PR stunt of “lowering fees,” but the reality is that such fees were too high in the first place. Don’t be fooled by the PR stunts!
Have you ever tried switching between the 4 major banks? Is the time and cost of switching between the 4 major banks worth it when you will get more of the same?
What we need is more diversity in the banking sector. We need to support the few remaining smaller banks. We need to support credit unions and other non-bank financial institutions.
Supporting these alternatives to the 4 major banks is not, however, going to help if these alternatives are allowed to be taken out by the 4 major banks.
Unfortunately, the current anti-merger laws will let it happen. That’s why we need a stronger anti-merger law. We need an anti-merger law that stops mergers or acquisitions that will materially affect competition in the market.
Will there be less competition in the market following the merger or acquisition? If so, then we need to stop it. We need to protect competition, because once it’s lost it’s very hard to resuscitate.
Just look at the 4 major banks. As they get bigger and more dominant, the prospect of new entrants to take them on becomes more remote. Just pause a moment if you think that there will be an opportunity to take them on.
Yes, new players like RAMS, Aussie Home Loans and Wizard did take them on, but it took them years to get established and now they’re gone. And now interest margins for the 4 major banks are on the way up and you’re paying the price for the dominance of the majors.
New strong anti-merger laws are needed to stop the 4 major banks’ continued onslaught on any possible threats or challenges to their continued dominance.
We also need effective laws against creeping acquisitions. These are small scale acquisitions by the 4 major banks where they take out the competition bit by bit, thereby flying under the radar when it comes to our competition laws.
Small scale acquisitions by the 4 major banks are just as detrimental to competition, but are even harder for the ACCC to stop under our current anti-merger law.
The Federal Government promised us laws against creeping acquisitions, but we are yet to hear from the current Federal Minister for Competition Policy and Consumers Affairs, Dr Craig Emerson. Let’s hope for competition and consumers’ sake, Minister Emerson shows leadership on the issue and quickly gives us effective laws against creeping acquisitions.
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@heldavidson Me too! But have always been to scared to say that :)
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