Detailed Analysis: Australian Four Pillars Policy in Banking Industry

This report provides a comprehensive analysis of the Australian government's Four Pillars Policy in the banking industry. It begins by outlining the historical context of competition in Australian banking, including the deregulation of the 1980s and the dominance of the 'big four' banks. The report details the Four Pillars Policy, which prohibits mergers between the largest banks, and examines its implications for competition and consumer welfare. It further discusses the outcomes of the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, highlighting key findings related to misconduct, regulatory failures, and conflicts of interest. The report concludes with a discussion of the future direction of the Four Pillars Policy, considering whether to maintain, amend, or abandon it in light of the current market dynamics and regulatory landscape. The report emphasizes the need for robust competition policies and regulatory oversight to protect consumers and prevent excessive market concentration, and it references key sources such as APRA reports and academic research to support its analysis.

Assessment of the Australian Government’s Four Pillars Policy in the
Banking Industry

ABSTRACT
The power of the big banks in Australia is unambiguous, the underlying
revenue are equated to almost 3% of the GDP of the country, this is as a
result of the high concentration of the big players in the industry.
Traditionally the commercial financial institution have to serve the social
interest as well as the economic function that is provision of adequate
services to the community and ensure that they supply and advance credit
facilities. Presently the modern system of banking has focused more on the
maximizing of the share of the market and this means that sometimes it acts
against the interest of the consumers and the large community. Further this
has prompted a reaction from the government for greater regulation in the
sector. The government ensures that the consumers are well served with
adequate financial information, also ensuring that the banks operate within
the interest of the public at large.
Furthermore, the government should ensure that the environment where the
customers operate in and make financial choices is well organized and
equitably, in a way that is destined to authorize the individuals rather than
the big banks. The makers of the policies in Australian regulatory
environment have a huge task to battle against the strength of the big banks
in Australia, and the major huddle is the competitive edge that they possess.
The common wealth bank was established to deliver unaffected rivalry
counter to the large private banks.
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Contents
Contents..........................................................................................................3
Introduction.....................................................................................................4
History for Competition in Banks.....................................................................4
The four Pillar Policy........................................................................................5
Implications on implementing the Four Pillar Policy........................................5
Outcomes of the 2018 The Royal Commission into Misconduct in the Banking
.........................................................................................................................6
Superannuation and Financial Services Industry, what direction do you
recommend the Government take with the Four Pillars Policy – maintain,
amend or abandon it?......................................................................................7
Conclusion.......................................................................................................7
References.......................................................................................................9
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Introduction
At the time when the financial segment was derestricted in the 1980s, banks
accounted for 50% of all borrowing in Australia. Today the figure is over 90%.
ANZ, Commonwealth Bank, NAB and Westpac presently control at least 76%
of the banking niche. This explains a good deal of profitability. According to
(Goot 2010, p. 78) Commonwealth Bank was established to increase
competition in the banking industry. It was setup to compete with the state
owned and private owned banks.
Looking at the Australian view of the banking sector the intervention brought
about by the government was through increased competition however the
case was not likely due to political and economic reasons (Rosammond
2002).
The financial system in Australia is built under two main activities that
include lending and the deposit function. This is predominantly dominated by
banks and the big banks that include ANZ, CBA, NAB and Westpac. Out of
the advanced loans outstanding in Australia ,91% was issued from banks and
the balance of that was issued by building societies, credit unions and other
minor financial institution. It has been noted that the banks in Australia
dominate the financial system, but the major four banks are the key players
accounting for 82% of total borrowing from the total 54 banks in Australia
and 78% of total deposits by the banks.(APRA 2010).For majority of the
customers , the deposits of the banks are a way of storing money for use
when ordinary transaction are made.
History for Competition in Banks
Since the financial markets in Australia underwent deregulation in the early
1980s, there were several forecasts that the more advanced the level of
competitiveness it would guarantee and possibly delivers the effective
improvements and an advantageous agreement for the clienteles in finance
sector. The verdict to liberalize was prearranged at growing the level of
rivalry as it was destined to eradicate the barricades to the entrance of new-
fangled competitors into the competitive banking business. More so over
time the big four major banks have consolidated their market power at the
expense of other financial institutions, foreign banks, credit unions. This
resulted to a feeling of over exploitation of market power by Australian
banks, this prompted the makers of policies to counter there actions.
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The big four banks are the biggest recipients of the market share they
control, they seem immune to competition from other industry players and
after the global financial crisis the banks have improved immensely , the
only regulatory feature that has worked against there market power is the
policies and the control actions by the RBA that has since imposed major
controls on prices and the fee charged.( J Campbell, 1981).
Lately the big four banks have tried to lay a right of the abundant credit on
the splendid performance of the economy in Australia over the slump period.
The sensible strong point hired by the banks is the basis of there success,
the power of the big four is distinctive, they have considerable influence in
the economy and their consumers. Their revenue is 3% of the GDP of
Australia that translates to every $100 spent, $3 is the profit made by the
banks. The revenues are very high because the market niche of banks
operations is majorly concentrated, with these main four banks that control
75% of the total bank assets and 90% of the borrowing advanced by the
financial institution (D. Richardson 2010).
The big players in the banking sector claim that since they contest with
amongst themselves then the rates of interest and the levies charged are to
be reserved at a sensible level. From statistics collected by the survey shows
that 43% of the big bank’s customers have not had a thought of switching
banks to others. (
The four Pillar Policy
In view of the attractiveness in the economies of scale in the banking sector
leading to the assumption that there is an additional concentration amongst
the other banks. The consolidation together leads to increase in revenues,
the reduced competitiveness is not healthy for the consumers, thus with no
weight from competitors as there is no valid reason for the institutions to
permit the reserves attained through economies of scale.
From past periods, the most critical themes have been the preventive aspect
of mergers of the big four banks amongst themselves, the policy termed as
the four pillars policy of banking. The general believe is that the situation
would be considerably worse if the current lasting banks did merge. The four
pillars policy were established from the previous six pillars policy by (Keating
1990). The four-pillar policy forbidden mergers between the four biggest
banks in Australia.
In the wake of the global crisis this big bank has even grown bigger, and
their total share has risen significantly. They are too big to fail but it’s also
too big to save them. According to R (Garnaut and D Llewellyn Smith 2009)
they argued that the regulation system in Australia should seek to ensure
that they avoid the emergence of banks that re too big to fail, and further
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they support the notion that new entrants of deposit taking institution that
have a conservative approach to borrowing would play a critical role.
Implications on implementing the Four Pillar Policy
The implementation of the Four Pillar Policy is well thought after since the
best aspect about a financial system is competition, which functions well for
modern economies, looking at an economy dominated with large players
would mean that they earn excessive revenues at the expense of the rest of
the consumers. Looking at the Australian banking industry there is a need for
non-market answers to protect the consumers and prevent the large
institution from monopolizing the revenues from the larger sector of the
economy. After the occurrence of the global financial crisis, that saw the
growth of the revenue of the bigger banks and their foothold in the banking
industry, my take is that strong policies on competition should be enacted
and strict actions against anti-competitive behavior will be far more vital.
The Australian government has been on the fore front of ensuring that the
market remains regulated and they have further gone ahead to encourage
the consumers to “shop around” , this is in the effort of encouraging the
consumers not to be reliant only on the major players but also others. The
government has also in the recent times introduced policies called the
switching policy that enables a consumer to be able to shift their accounts to
other commercial banks,
However, with present statistics it shows that only 3% of the people are not
willing to change their banks.
The competition policy is that it’s not as effective on large , and very
powerful industries like the Australian banking sector that is controlled by
the big four banks, thus the only solution to the sustaining of the economies
of scale is to ensure there is a functional and organizational decentralization
amongst the unlike roles of the banks and also be able to reduce the
revenue to 1% of the GDP.
Looking at the occurrence of the global crisis in 2007-2008 which was as a
result of irrational exuberance, a scenario where the commercial bank
advanced too much credit and the public borrowed too much. The
understanding of such behaviors in making financial decisions, do suggest
that when faced with many, hard, difficult and vital choices, a number of the
public will procrastinate, and tend to go for the flexible and easy way option
and worse is the dependency to the decisions made by other people on their
behalf. Thus, it justifies the need for the policy developers to play more of an
intervention role rather than be providers of more relevant information to the
same consumer.
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Outcomes of the 2018 The Royal Commission into Misconduct in the
Banking
The royal commission highlighted a number of queries that they felt the
banks were in breach of, some of the queries outlined are , what extend can
the law be made simpler to meet its intent, the approaches to addressing
conflicts of interest changes and the management conflict and renumeration
conflicts, how well to improve the law compliance and making the regulators
effective to deter misconduct and the consequences to be faced if any, how
do they realize good governance.
The regulators had all been affected by the conduct that’s had led to the
commission inquiries. From the royal commission interim report there was
breach of the general rules, the first one being the law must be applied and
enforced the commission criticized the conduct and revealed that the las was
not obeyed and lacked enforcement, there was deficiencies in culture in the
organisation and management of risk.
The commission further reveals that the codes of the industry are more
public, the promises set out in the public and they are envisioned to oversee
the relationship among the one acquiring and the provider of the financial
service and product.
The commission also noted that the corporations were hawking their
securities through unsolicited approaches to potential investors and that was
deemed unlawful. The commission finds the was no substantiable truth in
what was revealed to the target investor and the potential investor was not
able to ascertain whether it’s true they are not aware of what questions
should be asked. Hawking of financial products is prohibited by law
(corporation Act). The commission lays it down that there should be a
solicited meeting regarding discussing the financial product must not be
used for unsolicited offers.
Further findings reveal the Australian banking system lacks middle players
and even their duties and responsibilities, the commission further
recommends that it is very vital to distinguish the intermediaries and their
responsibilities. There was also a problem of conflict in the renumeration to
the directors, it was discovered that the hinge on the conflict renumeration
provisions, and that some of the payments made had an influence on the
possible choice or criteria of financial product recommended to the retail
clientele (FSRC Report).
Among the other outcomes of the commission’s report is that after the global
financial crisis, the entities that provide financial services and the industry
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regulators in the country focused their attention on the risk in finance. There
was a growing culture of offering less concern to regulation of the market,
matters to deal with compliance and risk conducts by the industry players,
thus it led to growing pressure to deal with those issues (AMP interim report).
Superannuation and Financial Services Industry, what direction do
you recommend the Government take with the Four Pillars Policy –
maintain, amend or abandon it?
Nevertheless, there is no proximately superficial basis for discerning that the
exemptions are in the zones that mostly deceitful or unprincipled actions
may not yet prey upon the unsuspicious clients. The indication specified to
the Commission facts firmly in contradiction of preserving exclusions to the
all-purpose exclusion, at least in respect of superannuation and insurance
products, other than the two exceptions mentioned offers not made to retail
clients and offers made under an eligible employee share scheme.
Conclusion
Most presently the major banks in Australia have experienced huge profits
that has accounted for the 3% of the Gross Domestic Product of the country,
this has gone further to show that they have used their prudential strength
to realize it, the large profits are driven by the high concentration of the
major banks as they control a higher percentage of the total market share.
Looking at the backdrop of the financial crisis that rocked the globe and the
collapse of the financial system, it was realized that the bigger the banks the
much safer it is and the bigger the revenues the much safer the banks would
be in the ever-uncertain financial system. From the Australian case the
believe that holds is that the consumers in the banking sector hold on the
belief that it is much safer to deposit their money with a bank with bigger
profits, the comparison that the customers of the bigger banks and
influential and more profitable banks is that revenue is equated to safety
thus most consumers based their decision on the same.
Over the years the makers of policies around the globe and also in Australia
have recognized the struggle by many individuals in making informed
financial decisions. The policy makers have resorted to ensure that financial
literacy is promoted by educating and creating awareness, this has also been
driven by the need created by the users of the financial information to what
to improve their knowhow. The consumers should also be able to know the
various ways that the providers of credit may try to persuade them to
subscribe to more debt which is not necessarily in their best interest.
Looking at the competition policy it has not been effective towards the large,
powerful banking industry that is enjoying the competitive advantage as a
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result of economies of scale. The regulators have adopted many ways to help
bring the revenues to a reasonable level through employing expressive
procedures in advertising and marketing of financial products. The challenge
is relaying the same technique without additional information that is useful
to the customers leds to mistrust amongst the consumers.
Finally, the Australian government is required to ensure environment in
which the public make financial decisions is well structured and fair in the
best way to empower ordinary public not only the big banks.
References
APRA (Australian Prudential Regulation Authority), 2010. Statistics: Monthly
Banking Statistics,
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Australia, House of Representatives Standing’ Committee on Economics,
(2008). Competition in the banking and non-banking sectors, Commonwealth
of Australia, Canberra, November.
Richardson, D (2010). A Licence to Print Money: Bank profits in Australia,
Policy Brief No. 10, The Australia Institute, March. Available at:
https://www.tai.org.au/index.php?q=node%2F19&pubid=733&act=display
Goot, M. 2010, ‘Labor, government business enterprises and competition
policy’, Labor History, vol. 98, pp. 77–95.
J Campbell, 1981; Australian Financial System Inquiry, Australian Financial
System: Final Report of the Committee of Inquiry into the Australian Financial
System.
P J Keating, 1990. Proposal for Merger of ANZ Banking Group (ANZ) and
National Mutual Life Association.
R Garnaut and D Llewellyn Smith, 2009. The great crash of 2008: Ross
Garnaut with David Llewellyn Smith, Melbourne University Press, Carlton,
2009, p. 216.
Rosamond, B. 2002, ‘Imagining the European economy: “Competitiveness”
and the social construction of “Europe” as an economic space’, New Political
Economy, vol. 7, no. 2, pp. 157–77.
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