Big four banks set to increase market dominance

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In part two of her series on the future of financial regulation reform in Australia, Sandra Hajda suggests changes to US banking regulations threaten to further increase the dominance of Australia’s big four banks at the expense of smaller players.

[Click here to read the first part of this series.]

Part Two: Australia, Dodd-Frank and Basel III

According to a PwC document “How is US Regulation Impacting Australian Asset Managers?”, extra reporting to the SEC (United States Securities and Exchange Commission) will place a burden on Australian businesses already mired in paperwork and forced to jump through regulatory hoops. While the massive consultancy firm is obviously looking to peddle its wares (indeed, the last section – ‘How Can We Help?’ - describes PwC’s expertise in ‘gap analysis’, ‘implementation assistance’ and ‘registration assistance’ — it can even help firms under the Dodd-Frank pump to ‘[prepare for] SEC examinations and surprise visits through mock exams and interviews’) the concerns it raises are pertinent.

Will Australian businesses be unduly negatively impacted after the introduction of Dodd-Frank?

The current regulatory environment seems to be quite successful in ensuring that big players profit and smaller ones stay on the margins. According to the latest APRA (Australian Prudential Regulation Authority) report, 86.7 per cent of home loans now originate in the big four banks (Westpac, Commonwealth, NAB and ANZ). The trend of Big Four dominance continues despite efforts by Wayne Swan to foster competition by removing mortgage exit fees.

While ASIC chairman Tony d’Aloisio has come out saying that US regulatory changes (particularly the Dodd-Frank Act) will not impact Australia (he argues that the robustness of our regulatory system sheltered us, and will continue to do so), Steven Rice argues in the Financial Times that such changes ‘will adversely affect Australian banks’.

This impact would be felt by smaller players more than larger ones; thus laws designed to enhance the safety of the system after the 2008 financial crisis could simply contribute to the continuing dominance of our Big Four Banks.

It is when banks get ‘too big to fail’ that we see reckless risk-taking, followed by crises, and then bail-outs.

Some, like the Greens Adam Bandt, argue that changes ought to be made to the Competition and Consumer Act to prevent the Big Four from swallowing second tier institutions. According to the Sydney Morning Herald, it was takeovers – St George by Westpac and BankWest by Commonwealth – that helped the Big Four increase their mortgage market share from 57 per cent before the GFC to today’s massive 87 per cent. Once again, powerful interests come out on top in times of crisis.

Bandt was one of the MPs who supported the removal of exit fees. The idea was that people would move towards institutions offering better service and lower interest rates.

Swan’s implementation of this measure did not have much impact, though. Perhaps people are simply less eager to ‘shop around’ for good deals than anticipated. Similar Greens recommendations (capping ATM transaction fees, a compulsory ‘no‐frills no fee transaction account for consumers’ and the introduction of tracker mortgages may need to be taken with a pinch of salt. These measures are desirable but they are nowhere near sufficient or even very critical; the problems appear to run a little deeper.

Steven Rice argues in the Financial Times that we are in danger of ‘financial regulation overload’, citing both Dodd-Frank and Basel III (a Group of Ten response to the late 00s crisis) as culprits. APRA’s John Laker earned the ire of the Australian Bankers Association when he moved to introduce Basel III (which includes a stricter set of capital and liquidity requirements) two years ahead of the rest of the world. Laker stated that among his reasons were ‘positive benefits for … the stability of the banking system as a whole’.

Some institutions have gone into near-panic mode with the introduction of Dodd-Frank. Queensland investment manager QIC (a dealer in OTC derivatives) has established an internal committee to plan how to deal with Dodd-Frank requirements. The Australian government itself has set up a Centre for International Finance and Regulation to ‘boost Australia as a regional financial hub’.

The attempt to ward off disaster by creating new planning bodies is an interesting one. Tony d’Aloisio, who claimed that the strength of the Australia’s regulatory framework will protect us (d’Aloisio’s reluctance to admit problems and systemic weakness is understandable: he is the chairman of one of our regulatory authorities) did offer a couple of cautionary notes in his speech “Regulatory Response to the Financial Crisis”. He said that as international regulation changes continue:

“…there will be important overlap issues of policy which need to be dealt with. For example, how the FSB (Financial Stability Board) deals with executive remuneration from a stability point of view may be different to how IOSCO (International Organization of Securities Commissions) would deal with it for regulatory purposes… [T]he focus on a more global approach will lead regulators to increase the level of cooperation between them, to more effectively handle cross-border issues.”

This brings me to the first recommendation of this piece — representation on international bodies. D’Aloisio himself said that:

“Positions which become available on these bodies will become more hotly contested as jurisdictions seek a 'seat at the table'. Australia is well positioned on these bodies. For example, we have two representatives (RBA and Treasury) on the FSB and extensive participation by APRA.”

There is, of course, a danger that APRA would simply lobby for moves in the interests of the Big Four. In fact, back in 2010 there were reports that Westpac, Commonwealth, NAB and ANZ had won an exemption from Basel III; these proved to be incorrect. However, as Glenn Milne noted in the Drum at the time:

‘…if the Big Four were subject to Basel III they would simply pass on the increased liquidity requirements to lenders via another round of interest rate hikes.’

According to Steven Rice, in the Financial Times:

‘The lessons Australia can draw from the GFC are many. However, there are two that are more important. First, our markets have different characteristics to those overseas, and regulation to address problems overseas should be carefully considered before being implemented in Australia. Second, although our market was relatively insulated from the GFC, Australians doing business can still be impacted by overseas regulators trying to deal with the consequences of overseas regulatory failure.’

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