BANKING: by Jeffry Babb News Weekly
Big four banks overdue for a shake-up
, September 15, 2012
Australian banking is dominated by the Four Pillars, as Labor’s Paul Keating called Australia’s biggest banks when he was federal Treasurer.
In 1990, faced with a potential merger between the ANZ Bank and life office National Mutual, Keating stated that mergers between the four biggest banks (the Commonwealth Bank, Westpac, National Australia Bank and the ANZ) and the two largest insurers (AMP and National Mutual) would not be permitted. Larger banks could absorb smaller banks, which they did with alacrity, but the Four Pillars policy has held fast.
The so-called regional banks — the Bendigo and Adelaide Bank, Suncorp and the Bank of Queensland — have found it tough going.
The Bendigo and Adelaide Bank has a rather peculiar quasi-community structure, which is great for launching branches, but poses problems when they lose money, as some inevitably do.
The Bank of Queensland has a franchise structure. It had a big write-off in its commercial loan book. A link-up between the Bendigo and Adelaide Bank and the Bank of Queensland has been going around the rumour-mills for years, but nothing concrete has emerged.
The smaller banks are handicapped because the ratings agencies judge them to be less creditworthy than the big four, making it more difficult and more expensive for them to borrow money on the wholesale market.
Other start-up banks, such as Members Equity Bank, are finding it difficult to make headway against the entrenched banks.
New Zealand is in a similar situation to Australia, with a twist — all its major commercial banks are owned by the big four Australian banks. In an effort to provide more freedom of choice — and with a dash of nationalism — the New Zealand government established Kiwibank.
Kiwibank uses the New Zealand post office and several other businesses as outlets. In terms of customer satisfaction, Kiwibank outranks the major commercial banks.
The appointment of former National Australia Bank senior executive Ahmed Fahour as managing director and chief executive officer of Australia Post fanned speculation that Australia Post would launch a similar initiative.
It certainly has the expertise and bank network to do so. Australia Post has adapted to the Internet age by diversifying. It is also the main conduit for goods bought online.
It has been exactly the opposite for US Post, which carries mainly letters and is effectively bankrupt. Private firms such as the Universal Parcel Service (UPS) carry most packages in the United States.
Australia’s Four Pillars policy has its advantages. Our banks are, by international standards, well capitalised and well managed. They are, moreover, sustainable enterprises and have won awards for being so. They earn consistent profits, pay reliable dividends and form the foundation of many investment portfolios and superannuation funds.
But they do have some peculiarities. Most major commercial banks outside Australia are not nearly so reliant on domestic mortgages. Banks tend to be either commercial banks or mortgage banks, similar to our credit unions or building societies. The fact that the big four provide almost all of Australia’s mortgage finance, either directly or indirectly, means that they are under tremendous political pressure to keep mortgage interest rates down. The truth is household mortgages are barely profitable for the banks.
There are two words no economist likes to hear — “cross subsidisation”. Cross subsidisation means using the profits from the good part of the business to subsidise the not-so-profitable part of the business. This is not, to coin a cliché, economically rational.
But the banks offer home loans because most people do their personal and business banking with the bank from which they borrowed for home acquisition.
Overall, the big four have around 90 per cent of Australia’s mortgage market.
Although it might appear that mortgages are being subsidised by business borrowers, interest payments on home loans are not a tax deduction, while businesses’ interest payments are, so it is hard to compare the two directly.
Nevertheless, small business borrowers are effectively paying higher rates than big business or home borrowers.
Why, then, do small business owners tolerate this? Because they literally have no choice. Some of the bigger banks have a better reputation than others among small businesses. National Australia Bank (NAB) has the reputation for giving their entrepreneurially-minded customers a real red hot go.
In the end, the government can’t tell the banks how to run their businesses; but, as in all such things, there is a good deal of “nudge nudge, wink wink” involved.
One cannot help but think that if the government floated the possibility of setting up a special-purpose enterprise bank to cater for small and medium enterprises (SMEs), this might be the wake-up call the banks need. After all, lending to SMEs is highly profitable.