http://www.news.com.au/couriermail/story/0,,23772348-27197,00.html
Four Pillars policy is crumbling
FOUR pillars are a great idea . . . for a carport. To build a carport with two pillars is very difficult. With three pillars, it is easier, but not simple.
But with four pillars, hey presto, a simple, strong carport. Our financial system shelters assets, not cars. Four pillars may well give us a weaker financial system.
The Four Pillars policy prohibits mergers between the big four banks: ANZ, Commonwealth, NAB and Westpac. It was first introduced by Paul Keating and maintained by the Howard government.
Preserving the big four as separate banks was seen to maintain competition and branch numbers in the banking sector. It is thus assumed to have electoral appeal. However, as bank fees spiral ever higher, it is increasingly apparent that the four pillars policy fails to preserve competition.
Five years ago the general assumption was that without Four Pillars, the four big banks would merge into two; once one big bank had taken over another, the remaining two would have to merge to remain competitive.
The Westpac-St George merger will change all this.
Australia will have three large banks post-merger: Westpac-St George, NAB and Commonwealth, and a much smaller fourth, ANZ. This leaves ANZ looking very much like breakfast for NAB. In this new environment, if NAB and ANZ were to merge, Australia would be left with three pillars, not two. The Four Pillars is not a law that such a merger proposal would breach. It is simply a policy that such a proposal would legitimately test. Would the Rudd Government enforce the policy if pushed? Should they?
The main problem with the Four Pillars is that it flies in the face of the economics of international banking. The big four want to be engaged here and abroad in the full range of investment and commercial banking activities. Size, then, matters. This business requires deep balance sheets. Australia's big-four banks need to grow to compete in these markets. Yet Four Pillars denies them growth opportunities in the market they know best – our own. So they move abroad instead. NAB moved disastrously into the US with Homeside. More recently, a number of the Big Four have bought minority stakes in third-rate Chinese regional banks – which is all they can afford in China.
There is a US precedent, and it is a cautionary tale. In the 1970s, the prohibition on inter-state banking limited each US bank to operating in its own state. Citibank could not expand across the Hudson River into New Jersey. Bank of America could have customers in California, but nowhere else in America. And, under the Glass-Steagall Act, neither of these commercial banks could engage in investment banking.
And so the big banks headed south. They sought to grow by lending in Latin America and Africa, markets they did not then understand. The result was the 1982 Debt Crisis that bankrupted Latin America and Africa, and nearly destroyed the US banking system.
US law stopped US banks growing organically at home, and so they tried to grow, disastrously, abroad. Four Pillars has had the same effect on Australia's big banks. We've seen sizeable losses on their forays abroad, and I expect the recent moves into China represent tax losses in waiting.
The rationale for Four Pillars is that it preserves competition among banks and preserves bank services to rural and regional Australia. Yet the 20 years of the policy's life have seen dramatic rises in bank fees and dramatic reductions in branch numbers, especially in rural and regional areas. The policy is a failure. It is time for new thinking.
New policy that encourages banks to provide banking services where they are needed most, limits fees and supports our major banks in competing abroad is needed.
One policy would be to set bank licence fees as a small proportion of assets, and then redistribute that money back to banks in proportion to their number of branches in rural, regional and other under-serviced areas. In effect, this would mean the most profitable parts of Australian banking would subsidise branches located where Australians really want them to be.
On bank fees, simple old-fashioned regulation is the way to go. There is currently a senate inquiry into a Bill on bank and credit card fees that proposes to limit fees to a genuine pre-estimate of the cost to the bank of dealing with the issue for which the fee is charged.
Finer minds than mine doubtless can develop better solutions. What is clear is that NAB and ANZ may soon present Treasurer Wayne Swan with the opportunity to act.
Let's hope so. If the banks don't force a decision from this Government, there's no sign the Government will act on Four Pillars.
Meanwhile, average Australians, and the Australian economy, are paying the price of that inertia.
Ross Buckley is Professor of International Finance Law at the University of NSW.
