Time to take out ‘too-big-to-fail’: Economists

by AB08 Jan 2014
The previous two major financial system inquiries categorically failed to address competition issues in the nation’s banking sector, say leading economists.

Former ABA policy director Nicholas Hossack, and Pegasus Economics principal Alistair Davey say the major four banks have consistently lagged the regional banks in customer satisfaction, yet continued to dominate the market.

“The major banks have always lagged [in customer performance results] and only recently have managed to make headway, narrowing the gap,” Hossack and Davey wrote in an article in The Australian.

“In a normal market, you would expect this divergence to have an effect on market share. The opposite has happened. The least popular institutions have increased market share, both through attracting customers and by mergers.”

If the ‘too-big-to-fail’ issue had been addressed previously, the Australian banking system would be markedly different, they wrote.

“This doesn't necessarily mean it would be superior, but the major banks would be smaller and the regional banks would be larger. There may also be more divergence in strategy among banks.

“Rather than the system dominated by four, Australia's banking system would likely be characterised by about 10 medium-to-large banks, with each institution having an asset base of about $200 billion.”

Australia’s banks are also heavily invested in domestic real estate, restricting support for small businesses and entrepreneurs, particularly those reluctant to risk the family home as loan collateral, said the pair.

While the big four have been blamed for these issues in the past, too-big-to-fail is really a political issue, they said.

“If a credible commitment to competitive neutrality cannot be made, then this opens up a whole series of other questions. Do we just accept an uneven playing field? Should large banks be able to earn commercial profits if they are actually implicitly taxpayer subsidised?

“Neither Campbell or Wallis cracked this nut. If Murray can do so, he will add considerable value to the system going forward.”

COMMENTS

  • by Patrick Mcmenamin 8/01/2014 11:35:22 AM

    Too many good sized regional banks have been gobbled up by the majors. State Bank (NSW), Bank SA, Bank West, Bank of Melbourne etc etc. The ACCC should have simply said no and encouraged mergers between these to gain enconomies of scale as an alternative.