Comprehensive Analysis: Four Pillars Policy and Australian Banking

This report provides a comprehensive analysis of Australia's Four Pillars Policy, which restricts mergers and acquisitions among the four major banks. It explores the policy's origins, arguments for and against it, and its impact on the Australian economy. The report references the Hayne Commission's observations and the financial profitability of Australian banks. It discusses the conflicting opinions on the policy, with some viewing it as a protector of smaller banks and others as a hindrance to competition and internationalization. The analysis includes the role of regulatory bodies like ACCC and APRA, the impact of the policy on global competitiveness, and the findings of the Murray inquiry. The report also examines the Royal Commission's findings regarding misconduct within the banking sector, the global position of Australian banks, and offers recommendations for the future. The conclusion summarizes the key findings and the lessons learned from the analysis.

Running head: ANALYSIS OF FOUR PILLARS POLICY
Analysis of Four Pillars Policy
Name of the Student
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Author Note

1ANALYSIS OF FOUR PILLARS POLICY
Executive Summary
This report contains an analysis of the four pillars policy prevalent in the banking sector of
Australia. It starts off with an introduction which mentions the circumstances under which this
policy was implemented. It then goes on to mention the knowledge acquired from the various
sources of literature available through different sources. The arguments for and against the four
pillar policy are stated along with its impact on the Australian economy as a whole. The analysis
is conducted on the observations of the Hayne Commission and the financial profitability of the
Australian banking sector. Recommendations are made about the steps that should be
implemented in the banking sector to overcome the problems posed by the four pillar policy. The
report ends with an overview of the findings of the report and the aspects learned from it.

2ANALYSIS OF FOUR PILLARS POLICY
Table of Contents
1. Introduction..............................................................................................................................3
2. Research...................................................................................................................................3
3. Analysis....................................................................................................................................7
Royal Commission Report...........................................................................................................7
Global position of Australian Banks............................................................................................8
Recommendations........................................................................................................................8
Conclusion...................................................................................................................................9
References..................................................................................................................................11

3ANALYSIS OF FOUR PILLARS POLICY
1. Introduction
The four pillar policy is a policy in the Australian Banking sector implemented by the
government of Australia. The main rationale of this policy was the prevention of the
merger or acquisition of the four major banks in Australia. These include the
Commonwealth Bank of Australia (CAB), Westpac Banking Corporation (Westpac),
Australia and New Zealand Banking Group (ANZ) and National Australia Bank. This
policy was first pronounced in the year 1990. Many researchers suggest that this policy is
a product of the political environment existing at that point of time. As Australia had just
faced the economic crisis in the early 1990s, people expected the government to become
more proactive and form policies which had a closer control on the banking companies
and their activities in Australia. At the time of its introduction, this policy was known as
the six pillar policy. It covered the above mentioned four banks and also included two
major insurance firms in Australia, namely Australian Mutual Provident (AMP) and
National Mutual. However, the Wallis report of 1997 suggested that the policy should be
dismantled to allow Australian financial institutions to compete on a global level
(Aph.gov.au 2019). However, the government did not take all of his suggestions into
consideration and the then Coalition Treasurer Peter Costello removed the two insurance
firms from the regulations of the policy. Although this was considered to be a good step
forward at that point of time, there have been no changes ever since and the four pillar
policy continues to remain in place.
2. Research
Over the years, the opinions on the four pillar policy have been conflicting in nature.
Some consider it to be an extremely progressive policy which helped in the survival of

4ANALYSIS OF FOUR PILLARS POLICY
the small scale banking companies in Australia. However, other consider it to be an
outdated policy. They hold this policy responsible for prioritising stability at the cost of
compromising the efficiency, competition, internationalisation and the growth of the
Australian banking sector. The former chairman of the Australian Prudential Regulation
Authority (APRA) and the CEO of Promontory Financial Group Australasia, Jeffery
Carmichael noted that this policy was primarily responsible for the prevention of
Australian banks competing at an international level and become globalised during the
early 2000s. At that point, mergers and acquisitions were going on at a very quick rate
internationally. This limited the Australian banking sector (Sheedy and Griffin 2018).
The financial consolidations in Australia are overseen by the Australian Competition and
Consumer Commission (ACCC) and the Australian Prudential Regulation Authority
(APRA) (Wu 2008). They are tasked with the responsibility of determining whether a
merger or acquisition is against the benefit of public’s interest in healthy commission or
not. However, the mergers among the four pillar banks are not covered by these
authorities and are automatically applicable under the Four Pillar policy. The four pillar
policy exists due to the will of the treasurer and is not covered by any existing legislation.
The rationale suggested by Peter Costello at the time of this policy was that it provided
scope for an increased competition in the existing Australian market. The problem caused
due to this policy was clearly evident ever since its inception. It was suggested that the
policy prevented the big four banks from acting as a threat to each other. One of its
prominent critics in the recent times, the Productivity commission, has suggested this
policy to be completely unnecessary and responsible for repressing competition in the
Australian banking sector. The commission made further observations that while the

5ANALYSIS OF FOUR PILLARS POLICY
main objective of the four pillar policy was to protect competition in the Australian
banking sector, it ended up protecting the status of the four major banking companies as
the dominant players in the market (Pc.gov.au. 2019). The lack of risks that were taken
by the major banks due to the restrictions of the policy and its emphasis on stability
resulted in the lack of growth in the smaller banking companies. However, there are
others who suggest the benefits of this policy. They mention that as Australia did not
catch the trend of increased mergers between banking companies on a global scale, the
banking sector remained relatively immune to the adverse impact of the global financial
crisis of 2008. This argument was supported by the IMF which suggested that four policy
provided scope for competitive stability within the financial markets and reduction of the
risks inherent due to the concentration of power with a single firm. An inquiry
commissioned by the Tony Abbott government in the year 2014 known as the Murray
inquiry suggested that concentration in the banking sector led to the problems in a single
banking company impacted the banking system and financial sector as a whole and
caused critical problems to the functioning of the economy (Fsi.gov.au 2014). Hence,
they suggested that this policy should be kept in place for the benefit of the nation.
However, the criticism that is levied against the Murray Commission is that the terms of
reference taken by it were very narrow and it did not have enough powers to completely
uncover the level of misconduct happening in the financial sector. It was argued by
former treasurer Wayne Swan that the four pillar policy should be changed into a five
pillar policy due to the impact of the merger between insurance giants AXA and AMP.
Some researchers firmly believe that the four pillar policy is a product of the populist
politics existing in Australia at different points of time and would have been eliminated

6ANALYSIS OF FOUR PILLARS POLICY
by now if the recommendations of the experts were properly taken into consideration.
The intention of the governments was never to maintain a sound regulatory regime but
only to benefit themselves as much as possible through this policy (Berg 2016).
However, this policies restrictions were limited and it could not prevent the major
banking companies from acquiring other banks and insurance companies apart from those
forming a part of the four pillars. Some of the examples of these acquisitions include the
takeover of the Colonial Group by CBA in 2000 and the takeover of the State Bank of
NSW by the Colonial Mutual Insurance Group in the year 1994. These mergers, although
significant in nature, could not match up to the level of those taking place on an
international scale and hence continued to limit the Australian financial sector. In order
to make themselves bigger and better, the banking companies began to think of ways
around the limitations imposed by the four pillar policy. One of them was the acquisition
of foreign banks to be able to benefit the business. However, not all of these foreign
takeovers and mergers proved to be successful and hence the companies had to divest
these investments in the foreign companies and return to Australia for conducting their
business. They also had to sell off most of their local subsidiaries involved in providing
wealth management services. Another challenge faced by these banks is the improvement
in technology levels which necessitates the presence of smaller banks in the interiors of
the country as it is not possible for the larger banks to conduct all activities by
themselves. A merger between the banks also provides scope for the access to a wider
market which is heavily restricted by the four pillar policy. The risk that was mainly
ignored was the participation of Australia in the Trade in Services Agreement (TISA)
with the United States and the European Union. Many of the experts feared that the

7ANALYSIS OF FOUR PILLARS POLICY
limitations of the four pillar policy would result in the takeover of an Australian bank by
a foreign bank of higher stature (Marchetti and Roy 2014).
3. Analysis
Royal Commission Report
The increased inefficiencies and misdoings in the Australian financial sector led to the
announcement of the appointment of Royal Commission by Australian Prime Minister Douglas
Turnbull on 30 November 2017. It was headed by the honourable judge Kenneth Maddison
Hayne. Being governed by the Royal Commissions Act 1902, this commission was more
powerful than the previous committees as it had unrestricted access to the information that it
required and could summon all the parties for its inquiry at their convenience (Gilligan 2019). In
this commission’s hearings, the ANZ bank admitted that they had failed to maintain the expected
standards in terms of credit products. CAB stated that even they had been involved in limited
misconduct in relation to areas like insurance, terms of credit and responsible lending. All of the
major banks admitted to being a part of fraudulent activities and falling below the acceptable
standards that were expected by the community from them. The judge remarked that the
companies did not only acted in an unethical manner but had cheated the customers who had
placed their trust in them. However, the honourable judge Hayne noted that the entire fault did
not lie with the banks themselves. He criticised the roles of the regulatory authorities like ASIC
and APRA for failing to properly regulate the activities being undertaken by the banks in the
financial markets and failing to impose timely penalties on them. An emphasis was laid on the
increased need of transparency in the banking sector and a need to undertake measures which
increased people’s faith in the financial system as a whole (Brämer and Gischer 2013). There
were reports of instances where the banks charged service fees from customers without actually

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providing the service and unnecessary charges being taken without any proper evidence to
support the same. The fact that oligopolistic behaviour was exhibited by the big four firms was
highlighted in the observations of the judge (Australia Financial System Stability Assessment
2019).
Global position of Australian Banks
Despite the comments made by Justice Hayne about the fraudulent practices of the
Australian banks, there are only three banks in the world’s top 500 profitable businesses. There
are none in the top 100 businesses and the top 200 businesses. The average return on the
shareholder’s funds in case of most Australian banks has been 14.8 percent while the best
practice in case of any large scale business has been 22 percent. Despite their best efforts, the
Australian banks have been unable to remain profitable over the years and their business has
mostly stagnated. There is a need for the introduction of more dynamism in the policies of the
banks which increases their profitability. The four pillars policy mostly restricts them in this
aspect and hence to be able to remain immune from the takeover by a foreign bank, there is a
need for the deregulation of the Australian banking sector and allowing more competition in the
market.
Recommendations
It is extremely difficult to suggest that the four pillar policy banking policy has been an
outstanding success or a complete failure. Although it can be suggested that it has continued to
limit the growth of the Australian banks on an international scale, it is also responsible for the
safeguard of the financial sector of the country after the 2008 global financial crisis. However,
one thing that can be firmly stated is that the times since when the policy was first introduced

9ANALYSIS OF FOUR PILLARS POLICY
have completely changed. There is a need for a new and more robust policy that is in line with
the market conditions existing in the current market. The financial crisis that was faced by
Australia in the 90s cannot be entirely blamed on the lack of restrictions imposed on the banking
companies. As stated by the Royal Commission report of 2018, there is a need for major
structural changes in the way the financial system in Australia operates. The regulating
authorities have failed to perform their job appropriately over the years. Restricting competition
and mergers among the banking companies cannot be suggested as a feasible solution for
safeguarding the customers and maintaining a stable financial system. In fact it is a restrictive
practice which provides the major banks to significantly exploit the customers while also not
contributing any substantial contribution to the economy. Hence, this policy should be done
away with for benefitting the banking sector. There is a need for the implementation of major
structural changes in the financial sector which maintain a proper balance between managing the
expectations of the stakeholders and protecting the customers against the fraudulent activities
undertaken by the banking companies. More support should be provided to the small scale banks
to ensure that they are able to cope up with the increased competition and changing business
environment.
Conclusion
On the basis of the above discussion, it can be concluded that the four pillars policy has
been a moderate success since its introduction in the 1990s. While some researchers suggest that
the policy was a result of the populist policies of the ruling parties existing at that time, some of
its positive aspects cannot be ignored. However, its main flaw is the fact that it restricts
competition in the banking sector and prevents the growth of the economy as a whole. This
limitation cannot be backed up by the government by suggesting the benefits of regulations as a

10ANALYSIS OF FOUR PILLARS POLICY
reason. The banking companies and their activities along with the risks of concentration of
power cannot be suggested as the sole reason for the potential risks faced by the financial
system. As suggested by Commissioner Hayne in his report on the misdoings taking place in the
banking sector, there are some major structural problems in the Australian financial system and
the regulatory authorities are equally responsible as the banking companies for the frauds
occurring in the financial sector. In order to overcome these problems, it is important that the
four policy is removed and the banks are allowed to be grown to fulfil their potential. There
should instead be an increased emphasis on transparency and increased information sharing in
the financial system. The removal of the four pillar policy also increases the competition
amongst the existing players in the market and also provides a chance for smaller firms to grow
and fulfil their potential.

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References
Aph.gov.au. 2019. The Wallis Report on the Australian Financial System: Summary and
Critique – Parliament of Australia. [Online] Available at:
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/
pubs/rp/RP9697/97rp16 [Accessed 16 Sep. 2019].
Australia Financial System Stability Assessment. (2019). Washington DC: IMF.
Berg, C., 2016. Safety and soundness: an economic history of prudential bank regulation in
Australia, 1893-2008.
Brämer, P. and Gischer, H., 2013. An assessment methodology for domestic systemically
important banks in Australia. Australian Economic Review, 46(2), pp.140-159.
Fsi.gov.au. 2014. [Online] Available at: http://fsi.gov.au/files/2014/04/ABA_1.pdf [Accessed 16
Sep. 2019].
Gilligan, G. 2019. The Hayne Royal Commission – just another piece of official discourse?
Australia: Hart Publishing Law and Financial Markets Review.
Marchetti, J.A. and Roy, M., 2014. The TISA Initiative: an overview of market access
issues. Journal of World Trade, 48(4), pp.683-728.
Pc.gov.au. (2019). Competition in the Financial System. [Online] Available at:
https://www.pc.gov.au/news-media/speeches/competition-financial-system [Accessed 16 Sep.
2019].
Sheedy, E. and Griffin, B., 2018. Risk governance, structures, culture, and behaviour: A view
from the inside. Corporate Governance: An International Review, 26(1), pp.4-22.