Bank mergers and new competitors in the banking market
Merger policies generally
The Senate Economics Committees have examined mergers policy in a
variety of contexts in recent years. They have generally concluded that the
current regime is excessively permissive of mergers and has allowed undesirable
concentrations of market power in a number of sectors. Some conclusions from
those earlier reports are:
The Committee believes concerns about the impact of 'creeping
acquisitions' on competition are valid. It agrees that the current provisions
of section 50 of the Trade Practices Act are insufficient to address the
The Committee recommends that the Government retain the 'four
pillars' policy of not allowing a merger between any of the four major banks.
The Committee recommends that a moratorium be placed on
approval of any further takeovers in the banking industry for one year, unless
the bank being taken over is at imminent risk of failure.
The Committee reiterates its recommendation that the Trade
Practices Act be amended to inhibit firms achieving market power through
takeovers or abusing market power and that 'market power' be expressly defined
so that it is less than market dominance and does not require a firm to have
unfettered power to set prices. A specific market share, such as, for example,
one third (set based on international practice), could be presumed to confer
market power unless there is strong evidence to the contrary.
ACCC approval of mergers
Section 50 of the Competition and Consumer Act 2010
(formerly the Trade Practices Act 1974) states that mergers which have
the effect of 'substantially lessening competition' are prohibited unless the Australian Competition Tribunal
authorises them on the grounds that they give rise to a public benefit. The
ACCC's position is that a lessening of competition is substantial if it creates
or confers an increase in market power on the merged firm and/or other firms in
the relevant market that is significant and sustainable.
Reviews of mergers
A review of previous merger decisions may lead to improved outcomes. At a
hearing, an academic expert on competition, Professor King, saw considerable
merit in this suggestion:
...one of the things that would be desirable is an ex post
review of mergers more generally in Australia...That sort of exercise would allow
us to, in a sense, check that our laws are appropriate. We have a particular
set of tests in Australia relating to a substantial lessening of competition in
a market. Is that the appropriate test? The best way of working that out is to
look at the decisions that have been made.
Reflecting later, he added:
This type of retrospective study represents best regulatory
practice. The U.S. antitrust authorities have carried out this type of
study....The benefits of such a study are clear. It allows feedback to both the
regulators and the legislature about our competition laws and their
implementation. If the federal government made the resources available to do
this exercise (and required relevant businesses to provide relevant data, such
as retail scan data) then this would be a good outcome.
Mergers among banks
As noted in Chapter 2, and illustrated by the 'family tree' diagrams there,
the current market situation is the result of a large number of bank mergers in
Australia. The Chairman of the Australian Prudential Regulatory Authority
(APRA), Dr Laker told the Committee:
There certainly has been a narrowing in the number of authorised
deposit‑taking institutions in Australia over the course of the last 20
years. That consolidation has mainly taken place
at the smaller end of the market through the merger and exit of credit unions;
that has been a pronounced downward trend.
The Committee found in its 2009 report into bank mergers that there are
essentially four main views about the motivations for bank mergers:
the first is that it is about improving the efficiency of banking
by realising economies of scale and economies of scope or allowing banks to
meet the borrowing needs of increasingly large corporations;
the second is that it is motivated by increasing market power
(and hence profits), which will be reflected in lower interest rates on
deposits and/or higher interest rates on loans;
the third motivation is that banks may seek to merge in order to
reach a size at which they are 'too-big-to-(be-allowed-to)-fail'. There is
evidence that ratings agencies and markets believe that large banks are more
likely to be assisted in a crisis than small banks; and
the final view is that mergers are largely ego-driven, with bank
management seeking the greater prestige and salaries that come from running a
larger organisation. (There are also defensive advantages in getting larger. It
makes the bank less likely to become a takeover target itself, thereby
protecting the CEO's position.)
The Committee noted that it is only if the first reason is dominant that
mergers may be in the public interest rather than just in the interests of the
The Finance Union of Australia argued the need for tighter merger
regulations in the banking sector governed by a stricter public interest test.
In the case of the Westpac takeover of St George:
We had very vigorous exchanges with the ACCC around that,
particularly the St George merger. We made it crystal clear to everybody we spoke
to and particularly the ACCC that if they green-lit that merger they would
essentially end competition against the big four... We had a fifth pillar; it
was called St George, and Westpac were allowed to purchase it. We think that
the ACCC completely went missing at a time when they needed to stand up...A
thousand people lost their jobs as a result of that merger, and there are
probably 2,000 or 3,000 more people who are going to lose their jobs. With the
fall of St George, we have lost the only genuine competitor to the big four...No-one
has won out of that.
Other witnesses shared this view that the takeover of St George represented
a significant diminution of competition:
There is absolutely no doubt in my mind that the St George
acquisition by Westpac was a huge mistake. It was the beginning of the end. It
was the tipping point. St George was an intensive competitor, particularly in
relation to small businesses....the four big banks basically took out one
significant threat to them overnight. 
Even mergers with a smaller national footprint can have a significant
effect in the relevant state:
Senator PRATT—...I am interested to know whether there was any
perceivable difference in the small- to medium enterprise sector in Western
Australia on banking competition when BankWest was taken over by the
Mr Canion—We were particularly disappointed by the outcome
that that has delivered for the competitiveness of the sector. It has again
reduced the options available to small business. There was a discernible
effect, I would say, on the ability of businesses to get loans at a good price.
The impact of merger activity is felt by a range of companies, including
mortgage brokers. The Mortgage Finance Association told the Committee:
The mergers that have taken place certainly have not been
good from a mortgage broker point of view...The offer that the mortgage broker
makes to the consumer is: ‘Come to me. I can go through a whole range of
different lenders and a whole range of products and find the most appropriate
deal for you.’ So the fewer lenders there are in the marketplace lessens the
attraction of the broker and the pressure they can bring in terms of
competitive forces in the industry.
A number of submitters wanted the major banks to be prohibited from
making further takeovers of smaller banks:
...there should be rules governing takeovers of smaller
competitive financial institutions, which the big banks continually do to get
rid of their competition. There has been an increase in takeovers in recent
times, and enables the big banks get even bigger...
...the Government should rule out any significant future merger
and acquisition activity in the Australian retail banking system and the wider
financial services sector which would consolidate the dominance of any one of
the four major banks.
For two decades, there has been bipartisan opposition to a merger
between the four major banks. In 1990, the Treasurer the Hon. Paul Keating
announced the 'six pillars' policy opposing any mergers between the four
largest banks and two largest insurance companies.
Some witnesses expressed concern that while the four pillars policy is
what currently prevents mergers among the four major banks, it is only a policy
and is not enshrined in any legislation.
...if there were not a four-pillar policy, the four major banks
would seek to merge with one another... My deep concern is that it is only a
policy. It could at any point in time be changed at the whim of a particular
government in power, the suggestion being that the particular government may
justify the removal of a specific four-pillar policy by simply saying that
there are competition laws that would prevent mergers between the four major
banks. I have a lack of confidence in those competition laws...
If companies are run by people whose objective is to maximise
the financial interest of their shareholders... it is inevitable that it would
tend towards monopoly, because of the enormous economies of scale and the
enormous profits that come from a combination of economies of scale and market
The four pillars policy seems well supported, by both business and trade
The NSW Business Chamber supports the current four pillars
policy, and is concerned about the potential for further mergers to reduce the
number of second tier and regional banks. While acknowledging that some
consolidation of the banking sector was necessary to stabilise balance sheets
during the global financial crisis, further consolidation of market power
within the major banks should not be allowed in the current environment.
...the Australian Government must continue to ban any merger
between the big four banks. It is significant that the overwhelming majority of
commentators, policy makers, academics and regulators now credit the
maintenance of the 'four pillar' policy, at least in part, as having
contributed to Australia's banking sector avoiding the worst ravages of the
Global Financial Crisis.
There are two means by which mergers between the four majors may be
stopped. Section 50 of the Competition and Consumer Act prohibits any
acquisition of shares or assets which is likely to have the effect of
substantially lessening competition in the market. It would be a matter for the
ACCC and courts to determine whether a merger between two of the four major
banks would have such an effect.
Secondly, there is the Financial Sector (Shareholdings) Act 1998,
which requires the Treasurer's consent for any acquisition of shares in a
financial institution beyond the order of 15 per cent. This Act allows
governments to maintain the 'four pillars' policy.
Last year the Committee made the following observation:
The Committee is concerned that takeovers of regional banks
by major banks are not only reducing the number of competitors but are
specifically removing those banks most interested in lending to small business.
Given the evidence it has seen in other inquiries, most recently into the dairy
industry, the Committee is concerned that the existing provisions of the Trade
Practices Act 1974 may be insufficient to prevent further undesirable
takeovers in the banking industry. 
The issue of divesture has been raised as a possible option to
strengthen competition in the banking sector. Certainly the natural tendency of
the sector has been to consolidate, as the charts in Chapter 2 illustrate. One
witness considered that this might be reversed:
...an oligopoly might change its mind and embrace new entrants,
as we have seen in other industries like the pharmaceutical industry. The fact
of the matter is that new companies and new entrants bring the really new ideas
and the really new business models. There can be a model in an industry where
the bigger institutions actually benefit from that instigation to innovation.
The more common view is that direct action may be needed to force change
on the oligopoly. Some witnesses called for the ACCC to be given greater powers
to force divestiture, and pointed out it exists overseas:
Where we see a major concentration in the market—for example,
with particular superannuation and other investment platforms—we would think
that the ACCC should be able to continually assess how the market is working
where those levels of concentrations are and, where it is required, seek that
there be divestiture by the parent body. 
Virgin Money Australia told the Committee that:
Australia is a polarised market. The major banks have more
than 80 per cent of the market share and the rest of the market is in the
balance. I think that was reinforced during the global financial crisis with
the acquisition of a number of challengers, including BankWest and St George.
As a result of that it is more difficult for new entrants and regionals to
acquire scale. One of the recommendations we have put forward is that it is
worth considering requiring the major banks to divest some of those assets now
that we are through the GFC. That is as simple as, ‘Would those transactions
have been approved in a stable economic environment?’ The answer to that is no.
Overall we think that is a measure that would shift the dial. It probably
sounds extreme, but we think these are extreme times.
Currently the ACCC has only a very limited divestiture power: within
three years of a merger it can force a reversal if it can establish that it was
deliberately misled when initially reviewing the merger.
The Finance Sector Union of Australia has recommended that the ACCC be
given divestiture powers. It told the Committee:
Where we see a major concentration in the market—for example,
with particular superannuation and other investment platforms—we would think
that the ACCC should be able to continually assess how the market is working
where those levels of concentrations are and, where it is required, seek that
there be divestiture by the parent body.
Professor Milind Saythe also supported the introduction of divestiture
powers. He noted that measures to break banks up have been suggested in the US
and in the UK and 'Australia too needs to ensure that the financial system does
not develop pockets of dangerous concentration'. He told the Committee that
It would be a radical move...there is nothing in place at the
moment which really can work as a sort of deterrent to the major banks acting
against the interests of the community and producing suboptimal outcomes.
It is worth noting that the recent interim report of the UK's
Independent Commission into Banking, released in April 2011, has recommended
further divestiture of assets of Lloyds TSB, which is already under an EU
requirement to divest 600 branches.
Associate Professor Frank Zumbo argued the need for Australia's
regulators to have a divestiture power similar to those available in the United
States and the United Kingdom. He recommended that, as a practical way forward:
The Senate Economics Committee request within 3 months of the
date of the request a report pursuant to s 29(3) of the Trade Practices Act
as to circumstances under which the ACCC would apply for a divestiture order
pursuant to s 81 of the Trade Practices Act.
However, the ACCC noted that the divestiture power in the United States
targets a specific form of anti-competitive conduct:
Divestiture is not a remedy in relation to cartel conduct in
the US. It is a remedy for monopolisation.
Virgin Money told the Committee that the banks should divest some of the
assets they accrued during the global financial crisis (GFC). It noted that
given the high concentration of market share between the majors and the other
banks, which was reinforced during the GFC, the majors should be forced to
Others queried the need for a divestiture power. Treasury told the Committee
that mergers in Australia have in fact supported the stability of the financial
system. It noted that it is a basic strategy for governments to merge entities
which are faltering so that consumers do not lose out, and there is no
contagion in the system. Accordingly, Treasury argued that:
...it would be better to get more competitive competition
into the system so that we benefit from having a stable financial system, we
benefit from having that stable platform which the four majors give us. Whether
there would be a fifth pillar or not, what we want to get back to is a stable
platform and a competitive system. I do not know whether divestiture is the way
to go or is it to actually try to get others to be more competitive.
9.30 As has been noted elsewhere in this report, the
Committee considers that there is a need to consider the appropriate balance
between stability and competition. There is no question that a monopoly bank
would tend to be very stable. But it would also likely fail to deliver the most
attractive options for consumers. As such, Treasury is right to argue mergers
are likely to increase stability. The question is their impact on competitive
Encouraging new entrants
Another issue raised during this inquiry was whether the 1980s reforms
to open the Australian market to foreign banks were of lasting competitive
effect. The Committee asked the Governor of the Reserve Bank what had gone
wrong since these reforms. He responded:
...we did have very intense competition in the system in the
eighties mainly chasing corporate lending. Some of that came to grief with the
excesses of the late-eighties. A number of the foreign lenders were, in fact,
disproportionately represented amongst the group that lent to the entrepreneurs
who subsequently came to grief. In the nineties and 2000s there was some resumption
of that kind of competition in the business space and the competition to lend
to some of the more highly geared entities that came to grief two or three
years back involved foreign lenders as well.
The Governor added:
It was always going to be a tall ask for foreign institutions
to come in and compete with the size of that branch structure. That said, there
are today some foreign institutions that offer retail products—Citibank and
ING, for example. But were there prohibitions put on various things? I do not
know. Not that I am aware of, but that was 25 years ago.
Professor Sinclair Davidson argued that the signal for a foreign bank to
enter the Australian market is where Australian banks are earning supernormal
profits. He added:
So if banks in Australia are not turning supernormal profits
there is no incentive for foreign banks to enter. If foreign banks are not
entering into Australia that is because they are not perceiving there to be
unusually high profits in Australia. So our banking system is profitable, sure,
but it is not what economists might call a supernormal profit.
However, other submitters identified systemic barriers to foreign banks
competing in the Australian market. Most notably, foreign banks that come into
Australia as branches are not allowed to compete for retail deposits of an
initial balance below $250,000.
This restriction does not apply to subsidiaries.
This prohibition reflects Australia's unusual system of depositor
protection which, instead of explicit deposit insurance, has relied on
depositors having priority over other claimants and the ability of the Reserve
Bank to direct the operations of a bank in a crisis. These protections are much
more effective with a bank that is separately incorporated in Australia rather
than operating as a branch.
Another discouragement to foreign bank entry is interest withholding tax
on banks borrowing from foreign parents. This issue is discussed in more detail
in Chapter 15.
Treasury noted that the global financial crisis had had an effect on the
foreign bank market in Australia. It told the committee that the GFC:
...made it more difficult for them to raise funding and to
conduct their businesses. Also, we saw a withdrawal of some foreign banks from
Australia and a reduction in their banking, and just the general restriction on
credit availability across international markets made it that those who may
have been more dominant going into the crisis could exercise more market power
during the times when others had to withdraw their services.
One submitter believed the division of responsibilities between regulatory
agencies was not conducive to encouraging new competitors:
APRA are the regulator but seem only interested in the
prudential health of the industry, not competition. The ACCC handle competition
but will only act where a breach of the Trade Practices Act occurs; they
do not proactively pursue a competitive banking environment. The Australian
Payments Clearing Association (APCA) run the majority of payments systems and
are effectively an industry collective making their own rules. The RBA espouse
goals of decreased barriers to entry and increased competition (for the benefit
of the Australian people) but seem limited in their ability to tangibly support
new entrants. Treasury actually have a 'Bank Competition Unit' but, while being
supportive of new ideas, are limited by a need to remain neutral. Then there’s
the ABA who valiantly espouse the benefits of competition yet are unable to
point to any active or past initiatives on the topic.
Mutuals as a 'fifth pillar'
There are around ten building societies and over 100 credit unions,
collectively known as 'mutuals', which have 4.5 million
members across Australia and collectively account for around a tenth of
household deposits and home loans.
As their industry body explains:
Mutuals offer consumers a different model of banking - a
model where the customers own the credit union or building society. This allows
credit unions and building societies to put their customers first, without the
conflict that listed banking institutions face in providing shareholders with
dividends at the expense of customers....Customer-owned banking institutions are
not motivated to maximise profits or engage in irresponsible lending to drive
up returns to shareholders.
Suncorp Bank advocated a multi-tiered structure to compete with the
major four banks. It told the Committee:
Our belief is that a strong multi-tiered banking system is
the right model for the country. It provides a good competitive dynamic, good
choice for consumers and business customers and good options for investors in
terms of choice of different institutions. So, across a whole number of bands,
we believe that a multi-tiered structure provides the best balanced outcome
across the board. By supporting a fifth pillar alone, whilst there would be
some benefits for that organisation in the near term, recreating the
competitive environment that existed prior to the GFC, a multi-tiered structure
would achieve that.
Yellow Brick Road Wealth Management was guarded about the prospect of a
fifth pillar to rival the major four banks. It argued that in the current
environment in Australia, it is:
...very difficult to build a fifth pillar today. You might
have the opportunity to bring a big foreign bank in to do something like that
but I would say big foreign banks would not want to come here to take on
Australian banks today in this environment.
Mr Bouris noted that a large foreign bank would 'just become part of the
oligopoly' in Australia. Rather, he envisaged that a fifth pillar might be:
...a collective of smaller to medium players. I do not mean
120; we are talking about 20 or 25 medium-sized players who could all, in an
ideal world, have one per cent each of the market share. An 80-20 split would
be about the right percentage between the big banks and the smaller collective because
that is enough to make the banks consider market share instead of
profitability. When they think of market share, they start to reduce their
margins and try to attract more borrowers. That reduction in margin ultimately
is where we want to be because that flows on to the consumer as the better
Mr John Symond of Aussie Home Loans dismissed the idea of the mutuals
forming a fifth pillar. He told the Committee:
...to suggest that the mutuals can become the fifth force in
banking, quite frankly, is a joke. They are small corner stores, they do not
have infrastructure, they do not have technology, they do not have the clout
The Committee is aware that a particular challenge for the mutuals is
growing their capital base to underpin an expansion of market share. As Mr
Jonathon Mott, a banking sector analyst, told the Committee:
...if they go from around four per cent to 10 per cent market
share, which is what the government is intending, the amount of capital in the
system for the building societies and the mutuals would need to rise from $6
billion to around $10 billion to $12 billion, and maybe even a bit more. A
couple of things worth remembering are, firstly, that mutuals do not have
access to the capital markets, by definition. If a bank needed that they could
go to shareholders and raise equity. Secondly, the return on equity in the
mutuals is about eight per cent versus around 16 per cent in the major banks,
so they do not generate enough capital organically to be able to do that. The
only alternative would be to go to their members and ask them for capital. If
you are a member of a building society or a credit union, I do not think you
will be too happy...
Credit rating agencies
Institutional investors and international banks are familiar with the
major Australian banks and can easily form a view about the quality of their
paper or the risk involved in having them as a counterparty. (As discussed
further in Chapter 11, the perception that governments regard them as 'too big
to fail' means they are perceived as very low risk). Life is harder for most
ADIs which have a smaller profile. They are more dependent on assessments by
credit rating agencies.
Unfortunately for the mutual ADIs, the rating agencies appear to accord
too much attention to size and not enough to the underlying quality of assets:
This reliance we have on the rating agencies is a little
interesting, if I can put it that way. That was one of the core components of
the GFC: the very poor underwriting standards globally, specifically in the US.
These bonds were rated AAA, and we all know how that panned out. Therefore, it
is curious that, on the one hand, we say that the rating agencies did not coat
themselves in glory and, on the other hand, we base a whole system around
validating the rating agencies’ methodology.
Local councils trusted the opinions of credit rating agencies
rather than Australia’s prudential regulatory system and chose to invest in
AAA-rated exotic securities when they would have been better off depositing
funds in an unrated mutual ADI.
This [US financial] crisis could not have happened without
the rating agencies.
I do not think the rating agencies’ methodology has covered
itself in glory. There is a good argument that turns around and says: some of
the simpler organisations that borrow funds from their local community, invest
in their local community, know their local community and invest in solid assets
called housing are very, very safe institutions because they are not buying
CDOs and they are not trading foreign exchange...If you ask me: ‘Do I think
there is a bias against smaller organisations?’ yes, I do, because the answer
keeps coming back to your capital base...I disagree with that. I think what
you need to do is understand the underlying risks of the business and make sure
your capital supports the underlying risks of the business. I would say that
some credit unions are very, very safe organisations.
It is not clear that a small institution with a diversified
portfolio of financial assets would have a higher risk than a large banking
I can very easily mount a case that a $50 million credit
union is not as risky as the Commonwealth Bank: they do not invest in CDOs,
they do not have international operations, they do not have business banking.
But they will never be able to get a AA rating because they are simply not big
Proposals for a new government bank
A number of submitters essentially called for a new bank along the lines
that the original Commonwealth Bank was established around a century ago:
Create an Australia Bank, owed 100% by the people of
Australia through the Government of the day...Australia Bank...will be owned by the
people ...Centrelink benefits...will be paid directly into it the Australia Bank
and will not have any fees for deposits or withdrawals. The Australia Bank will
have a Home Loan rate set at a maximum, of 5% and be competitive against any
other financial institution for business and investment. It will be the
benchmark competitor that others will have to rise to the occasion, thereby
creating 'real' competition.
...the government simply introducing a new bank offering low
fees and reasonable interest rates. This new bank would be need to be
government-owned...Its charter would prohibit the bank from charging interest
rates greater than 2% above the then prevailing Reserve Bank rates, with any
shortfall in funds (not funded by retail deposits) to be borrowed from the
Reserve Bank. This should guarantee a reasonable profit for the bank, which can
be used to fund expansions to the bank network, with the excess to be paid to
consolidated revenue. In residential lending, the bank should be a specialist
bank which only lends to owner-occupiers (i.e. for people buying their own
homes) but not investors. With business lending, it should only lend to small
It is time the federal government and the Opposition stopped
talking about how they might tackle the banks ripping of their customers and to
act to reduce their power. How? By setting up another government‐owned bank to act as a brake to
the soaring interest rates, excessive profits earned by banks, egregious
fees and the excessive remuneration packages paid to our bank CEOs...There’s only
one way to create serious competition to such a strong banking cartel: do what
Prime Minister Andrew Fisher did in 1911 when he set up the Commonwealth Bank
of Australia as a government‐owned competitor. We need to set
up another similar bank.
...it makes sense to consider policy action to promote access
to safe and convenient basic banking. To ensure that guaranteed low-risk
banking services are universally available, government should consider the
establishment of a publicly-owned savings bank similar to the New Zealand
It is recommended that Government consider the establishment
of a Development Bank or SME Bank either as a Government Owned Bank or a
Government and Private Enterprise Joint Venture, so to support appropriate
styles of borrowing structures as needed for SMEs to maintain and grow their
businesses, and so to be able to continue to employ our consumer borrowers.
A related suggestion was for the Reserve Bank to provide basic banking
accounts for individuals.
A survey of Queensland businesses found that almost half supported the
government setting up a new bank to promote competition.
Another view was that it was at least an idea worthy of further
...a public bank is something that is worth looking at. Do I
have a strong argument in favour of a public bank? No, but it is something that
an inquiry could consider.
Further parallels were drawn with the New Zealand government-owned
The bank is both successful and popular, and continues to
fulfil its mandate of making banking services accessible to members of the
public at reasonable rates.
There have been calls for Australia Post to form the basis for a strong
competitor to the major banks:
Australia Post already has substantial and permanent
distribution outlets that handle a wide variety of financial services
transactions presently, and with little modification could handle banking
business in open style shopfronts.
The most obvious opportunity is for Australia Post to follow
the German example and set up a PostBank, purely focusing on retail consumer
banking. This will [be] the most efficient and effective way to stimulate
competition [in] the banking industry.
Associate Professor Zumbo argued that the government should explore
opportunities for Australia Post to offer basic banking services using its
extensive branch network. He noted that this could involve asking the
Productivity Commission to undertake a feasibility study into Australia Post
offering basic banking services and to review the overseas experience with
national postal services offering banking services.
A survey of Queensland businesses found that 45 per cent supported Australia
Post being used as a distribution channel for smaller lenders.
However, other submitters were less enthusiastic:
...the idea has drawbacks. Though the availability of multiple
outlets has appeal, one can't readily graft a bank onto a post office. It would
be a savings bank at best, and there are already adequate options in the
savings bank domain.
While APRA were not asked specifically about Australia Post, their
general requirements to allow an organisation to become an ADI were set out as
It needs to have adequate capital for the sort of business
that it wants to take on. It needs to have a strong and robust board if it is
coming into Australia and we are presuming it is here already but wants to be a
locally incorporated ADI. It has to have strong risk management systems and
strong personnel that can run those systems...It is a tough test to get past.
However, the Australian Bankers' Association points out that Australia
Post already plays a role in providing:
...agency facilities for banking transactions for at least 100
years and already acts as a distribution point for more than 70 banks and other
financial service providers. It is open for other financial service providers
to form the same commercial relationship.
Australia Post described themselves as 'an enabler of banking services'
and referred to their current activities:
Australia Post operates Bank@Post, a trusted neutral
intermediary service for the banking industry processing 125 million
transactions per annum in the wider payments industry; Bank@Post provides
personal and business banking services (deposit, withdrawal and enquiry) on
behalf of 70 financial institutions...over 1,470 of our rural and remote outlets
support Bank@Post providing accessibility for customers of financial
institutions in all parts of the country, irrespective of whether a financial
institution has a local presence or not.
Australia Post explained the role played by post offices overseas in
Internationally, postal organisations are active in the
provision of financial services. Some have been moving further into the space
(New Zealand Post), whilst others have created new entities out of their
banking operations (Deutsche Post). The models of operation vary greatly; for
instance Japan Post (Post Bank) and New Zealand Post (Kiwi Bank) operate banks
in their own right, whilst Post Italienne and Swiss Post operate as integrators
of financial services. Other entities, such as Post Norden, have a similar
set-up to Australia Post where they operate as an agent and aggregator of
financial services for many providers.
Another option to help farmers and other small businesses is to
resurrect an organisation like the Commonwealth Development Bank or the Primary
Industry Bank. The Council of Small Business Organisations of Australia has
argued the need for a small business development fund operated through a
The Committee has considered similar proposals in an earlier inquiry.
Some witnesses to that inquiry suggested that competition from the development
bank might lead the commercial banks to compete more aggressively in the small
business market. Others noted that a development bank could also fill the gap
during recessions through keeping credit flowing to businesses, farmers and for
mortgages, should the commercial banks be forced to restrict lending.
However, Treasury warned that unless there is a specific market gap,
such as that met by the Export Finance and Insurance Corporation, a development
bank can lead to market distortions. Specifically, the development bank could assist
lenders rather than borrowers by providing a cheap source of funding that can
be lent onwards at normal market rates. It could also stimulate lending to
borrowers who would not meet standard credit conditions, and who are not in a
position to repay their loans. Business representatives also doubted the
effectiveness of a development bank, noting that its creation would be a
permanent solution to what is not expected to be long-term problem.
Noting the evidence presented in Chapter 4 about the highly concentrated
state of the Australian banking market, and the likelihood that it leads to
bank customers paying more for banking services, the Committee would be
concerned if there were any further increase in concentration. The Committee
therefore strongly supports the retention of the 'four pillars' policy
preventing any merger between the four major banks. It also urges the ACCC to
take a strongly sceptical view towards any proposal for one of the four major
banks to take over one of the remaining regional banks.
The Committee regards forced divestiture as a major intervention in a
free market and regards it as a 'last resort' approach to increasing
competition. Instead it seeks other means of increasing the number of players
in the market. With the change to an explicit form of deposit insurance, the
preference for foreign banks to operate as subsidiaries rather than branches
could be reviewed as part of the broader review of the financial system called
for in Chapter 3. This same review could also examine means whereby current
non-ADIs could more directly compete with ADIs. This could include an
examination of the restrictions on ownership arrangements for ADIs.
There is also scope for a removal of some restrictions which are
currently impeding mutual ADIs from competing strongly with banks. These are
discussed in following chapters.
In 2010, the Committee concluded that the best way forward is
to increase competition within the existing commercial banks rather than pursue
a development or rural bank or to convert Australia Post into a bank.
The Committee still holds this view. It appreciates Australia Post's role in
delivering banking services to some rural and regional areas. It is commendable
that it provides services on behalf of a number of ADIs and thereby promotes
competition. It should continue to seek opportunities to improve the
community's access to financial services.
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