From the Smage:
HAS the "four pillars" policy outlived its usefulness?
According to a former Australian bank executive now working overseas, the bank protection policy is no longer appropriate and has resulted in shoddy customer service and high fees and charges.
I did some research on the four pillars in Finance: I reproduce my work here for your enjoyment.
Abstract
The policy disallowing mergers between the largest national banks is in place to protect consumers against the possible increases in fees and charges, as well as the lack of competition that could occur should any of the four pair up. Potential job and branch losses from synergies and economies of scale are arguments against lifting the blanket ban. However, changing the roles and responsibilities of the group of four is the best solution to ensure that competition remains.Question:Australia has a `four pillars’ policy in relation to domestic retail banks. Why was this policy introduced? Should it continue?
History
Since World War Two, few new banking licences were issued by the government to foreign banks. This shielded local banks from the competition. The environment changed when the Campbell Committee’s inquiry into the financial system (1979-81) was initiated, and many banks foresaw (accurately) that policy on international banks would be reversed, and higher levels of competition would exist (Wright, 1999). To battle these invaders, they began to group themselves in larger sizes so as to better compete.
- Australia and New Zealand Banking Group (ANZ) merged with the English, Scottish and Australian Bank in 1980 (ANZ, 2005).
- The National Australia Bank Group (NAB) took over the Commercial Banking Company of Sydney in 1981. (NAB, 2005)
- The Westpac Banking Corporation (WBC) brand was born from the merger of the Bank of NSW and the Commercial Bank of Australia in 1982.
Acquisitions of Challenge Bank (1995) and Bank of Melbourne (1997) followed. (Westpac, 2005)
- The Commonwealth Banking Group (CBA) is the exception to the above rule. As an established Federal Government bank previous to the creation of the Reserve Bank in 1959 (CBA, 2005), its size allowed it to compete without mergers or takeovers. It did acquire Colonial State Bank in 2000.
Amid this pattern of rapid consolidation and fearful of having gone too far, the then Labor government introduced the Six Pillars.
The Six Pillar House
Paul Keating announced the six pillars in 1990 (FSU 2005) to prevent mergers amongst the four banks (ANZ, CBA, NAB and WBC) and Australia’s largest insurance companies in Australian Mutual Provident (AMP) and National Mutual (now AXA Asia Pacific). The imagery of the pillars is poetic and simple, if one or more is removed (by merger) then the financial system will come under threat and may collapse. However, the Six Pillars policy “was never law…merely a warning to the banks not to get together” (Westfield, 1998).
The inclusion of insurance companies is strange, as banking and insurance are separate market segments that offer different services. Certainly, they are both financially related, but insurance companies do not offer bank branches, and banks do not have life insurance as their main line of business. The government of the time has claimed it would have incurred a “substantial lessening of competition” (S.50 Trade Practices Act 1974). Foreign competition was encouraged:
“In February 1992, the Government opened the door to additional foreign banks
[…] and branch banking status was made available.”
Reserve Bank of
Australia Bulletin September 1994, cited in Wright 1999.
The bank branches and the resulting services of rural and regional Australia were a particular focus of governments in introducing the four pillars. (Buckley, 2004)
Renovation: Then there were four
Under a government of a different persuasion, the Wallis Inquiry was established to review competition under the Six Pillar system, and any legislative changes that might need to be made. The inquiry recommended several changes including, allowing the ACCC to decide if mergers between banks and insurance companies were uncompetitive. The goal of protecting consumers remains the same, except that the insurance companies are excluded from the deal (Wright, 1999).
Peter Costello compromised, and removed only the insurance companies from the blanket ban to bring us to the policy that exists today. This did not change the core of the policy, which were the banks. Even though the ‘lifers’ have been available, no one has decided to move on them. AMP has not been an attractive due to corporate troubles (Nick Whitlam and Board) and the spectacular failure of its UK arm (Henderson), and AXA has always been a member of a worldwide group, that would probably only sell at an elevated premium.
However, between them, the four banks hold just under a quarter of shares in AMP (AMP, 2005 and Note), which shows the interest of banks in insurance, but also leaves the door open for an acquisition. ‘Raids’ sometimes occur for banks to build up a shareholding (ABC, 2003). Whether the financial ‘house’ threatens to fall if one of the banks successfully takes over a lifer is yet to be seen. ANZ has diversified into a life insurance partnership with ING.
The Codified Four Pillars
Peter Costello also ensured that the four pillars would be enforced by law, and as Treasurer he has significant powers to ensure the four banks do not merge.
Section 63 of the Banking Act, Section 11 of the Financial Services (Transfer of Business) Act and Sections 18-19 of the Foreign Acquisitions and Takeovers Act each have a section giving authority to the government of the day, through the Treasurer. The treasurer can delegate his responsibilities to, and take advice from the prudential regulator (APRA) with regards to all merger activity in the banking sector.
The ACCC is now purely responsible for the enforcement of the Trade Practices Act to prevent a lessening of competition.
Size Matters
The inability of banks to generate growth for shareholders domestically has forced them to go overseas in search on new opportunities. (Buckley, 2004) NAB holds interests in the UK (Clysdale and Yorkshire banks) and until recently in Ireland. Westpac has branches in the Pacific Islands. Acquisitions by Australian banks in overseas operations are often put down to the critical mass argument, advocated by Harper (1999) and dismissed by Fels (1998). To compete with banks like the Royal Bank of Scotland Group (RBOS), on a worldwide basis, banks need to be larger. This is especially so when dealing with corporate finance, when only very large institutions are designated as lead manager or underwriter. “Deep balance sheets support the investment banking activities of modern international banks” (Buckley, 2004)
Size also matters when dealing with losses. A larger bank can suffer bigger losses without folding, and hence the ‘risk of ruin’ is reduced, although exceptions such as Nick Leeson’s involvement in the collapse of Barings exist. (Harper 1999).
The House without Pillars
Australia falls behind many in the world, where ‘champions’ or large banks such as the Royal Bank of Scotland, Citigroup or JPMorgan Chase are formed,
A merger between members of the four pillars would allow such a bank to be created. At what cost? Closure of branches on main streets due to the duplication of branches, and job losses are obvious concerns, with estimates ranging from 10,000 to 20,000 jobs lost if the banks paired off. There is also substantial body of evidence suggesting that large scale mergers do not produce the efficiencies of scale that are usually touted as justifying them. (FSU, 2004 and Committee evidence). Introducing competitors to this market is difficult, as the barriers to entry are enormous. Local branches of overseas banks, such as HSBC operate, but in no way near the number a combined entity of the Four Pillars would form.
I agree with Buckley (2004), that the four pillars should be lifted, and support his solution for allowing mergers, whilst retaining service levels. The Big Four should be allowed to concentrate on their full range of corporate and financial services domestically and worldwide, but smaller regional banks would be allowed to take deposits and make loans through the branch network. They could feel free to merge as they wish, because competition would exist as each of the smaller banks grasps for new customers. Appropriate undertakings pursuant to the Trades Practices Act would need to be given by all of the participants to manage their behaviour, and the roles of the competition (ACCC) and prudential (APRA) regulators become increasingly important. How to manage the Big Four’s exit or retreat from everyday banking services would be the ultimate challenge. However, all of this is mere speculation until the remaining four pillars are broken down.
Conclusion
The Australian Government has always operated a protectionist banking system, ostensibly to ensure the safety of depositor’s money. When further competition was introduced, banks merged to compete better with foreign banks and this has continued in some way to the present. The combined Four/Six Pillars policy has been in operation for over a decade, preventing Australian Banks from becoming ‘superbanks’ in their own right. Job and branch losses from mergers are a rightful fear. Lifting the blanket ban on mergers between the big four, and splitting banking into two sectors; regional banks providing everyday transaction accounts, and leave the Big Four to become dedicated investment banks, mergers or otherwise.
Note: Extract from 2004 Full Year Report P.100 (Twenty Largest Shareholders)
2) Westpac Custodian Nominees Ltd: 11.71% (217,887,654 Shares)
3) National Nominees Ltd: 8.71% (162,038,928 Shares)
5) ANZ Nominees Ltd: 3.27% ( 60,752,129 Shares)
9) Westpac Financial Services Ltd: 0.86% ( 15,955,986 Shares)
Total 24.55% (456 634 697 Shares)
P.S Have not included references, they clog the page. They are available on the comments page