ESSA

ESSA

Pillars or Pillows?


Oscar Han

By

October 1st, 2015


Oscar explains Australia’s banking competition policy in light of the controversy around maintaining the ‘big four.’

This article first appeared in Short Supply 2015 – check out the full magazine via the Short Supply tab at the top of this page!


Chances are you’ve heard of Australia’s ‘four pillars’ policy, which absolutely prohibits the big four banks (‘pillars’) from merging with each other. This year, the policy turns 25. Has it served Australia well?

 

A brief history

The four pillars policy actually began life in 1990 as the six pillars policy. In that initial guise, it prohibited mergers among the big four banks and what were then Australia’s two largest life insurers: AMP and National Mutual. [1] Treasurer Paul Keating’s purpose for introducing the policy was specifically to block the proposed merger of ANZ and National Mutual. In 1997, Treasurer Peter Costello whittled down the six pillars policy to just four pillars. The policy has since remained unchanged. [2]

Curiously, the four pillars policy rests on purely tacit agreement (between Australian governments) rather than binding law. [3] Even if the policy were to disappear, however, the Australian Competition and Consumer Commission (ACCC) would likely keep an eagle eye on proposed mergers among the Big Four. [4] Accordingly, some consider the four pillars policy superfluous. [5]

 

Pillows?

Let us first explore the cartoon’s perspective on the four pillars policy. The cartoon mocks the policy’s grand purpose of preserving four independent ‘pillars’ to support Australia’s banking system. It ridicules the policy for doing no more than shielding each of the big four banks from competitive pressure exerted by each other — metaphorically, for providing to each bank a soft pillow on which it may rest its head despite lying in the same bed (i.e. the same market) as do its Big Four counterparts.

 

…or Pillars?

On one side sit economists who perceive nothing but a ‘pillows policy.’ On the other side, there are economists who applaud the four pillars policy for delivering Australia from the claws of the GFC. Their view is that unrestrained competition between banks triggers excessive lending, inordinate risk taking, and financial instability. Accordingly, while they concede that the policy dampens competition between the Big Four, they believe that this in fact helps stabilise the financial system. [6]

 

What do the econometricians say?

Our discussion of competition leads naturally to a discussion of efficiency. Small banks, unsurprisingly, can easily reap efficiency gains by upsizing. Large banks, however, can lose efficiency if their scale of business exceeds a particular size (the ‘maximum efficient scale’). In fact, the Big Four are so large that they have likely exceeded this size already. Consequently, consumers pay higher prices for banking services than would prevail in a competitive market. [7] It is possible that the maximum efficient scale for Australian banks will increase and thus justify a relaxation of the four pillars policy. Until that occurs, however, the Big Four should not be permitted to grow any bigger. [8]

 

Conclusion

If the econometricians are to be trusted, then the ‘four pillars’ policy and its name are for the time being justified. The line between pillar and pillow remains, however, a fine line indeed.

 

Oscar is an undergraduate armchair economist and the current Director of Publications at ESSA’s Monash branch.

 

[1] Valentine, T., & Ford, G. (2001). Bank Mergers in the Australian Financial System: Should the Pillars be Pulled Down? Economic Papers, 20(4), 36–53.

[2] Harper, I. R. (2000). Mergers in Financial Services: Why the Rush? Australian Economic Review, 33(1), 67–72.

[3] Macfarlane, I. (2009). The Crisis: Causes, Consequences and Lessons for the Future. The Australian Perspective. ASIC Summer School 2009 Report, 41–46.

[4] Valentine, T., & Ford, G. (2001). Bank Mergers in the Australian Financial System: Should the Pillars be Pulled Down? Economic Papers, 20(4), 36–53.

[5] Harper, I. R. (2000). Mergers in Financial Services: Why the Rush? Australian Economic Review, 33(1), 67–72.

[6] Macfarlane, I. (2009). The Crisis: Causes, Consequences and Lessons for the Future. The Australian Perspective. ASIC Summer School 2009 Report, 41–46.

[7] Moradi-Motlagh, A., & Babacan, A. (2015). The Impact of the Global Financial Crisis on the Efficiency of Australian Banks. Economic Modelling, 46, 397–406.

[8] Wu, S. (2008). Bank Mergers and Acquisitions – An Evaluation of ‘The Four Pillars’ Policy in Australia. Australian Economic Papers, 47(2), 141–155.

Cartoon from www.nicholsoncartoons.com.au

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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