Just not cricket! Australia's cosy banking oligopoly needs a shake-up
Australian Financial Review Jun 6 2018 3:15 PM
The Lex Column (Financial Times)
Investors can no longer shrug off the turmoil in Australian banking. The Australian Competition and Consumer Commission has laid criminal cartel charges against ANZ Bank, as well as Citigroup, Deutsche Bank and several senior executives.
The "four pillars" system that permitted a lending oligopoly has turned from smooth coastal highway into a washboard track bumping through the outback.
The policy was first expressed in the 1990s. Limiting mergers between the largest banks was seen as a way to preserve competition. Over time, instead of protecting consumers, it has exposed them to price gouging. Profits constituted 2.9 per cent of Australia's gross domestic product in 2016, according to data from think-tank The Australia Institute. That is the highest proportion in the world, slightly ahead of China and more than three times the figure for the UK.
Tuesday's criminal charges relate to a share issue by ANZ in 2015. They concern an alleged arrangement between Deutsche and Citi to sell a line of stock after the placement. Both banks say they will "vigorously defend (against) the charges".
All four big Australian banks have experienced governance problems, raising suspicions that the four pillars system created a culture of impunity. A royal commission is investigating fraudulent loan applications at National Australia Bank, inappropriate financial advice given at Westpac and ANZ and superfluous fees at Commonwealth Bank of Australia. This week, CBA paid $700 million to settle claims that it broke money laundering laws.
Analysts have now turned bearish on the sector, foreseeing higher capital and compliance costs. Fines will have little impact: they have so far been comfortably absorbed by fat profit margins. CBA, for example earned A$9.9 billion in the 12 months to December. Investors receive gross dividend yields of almost 9 per cent — more than twice the yield on Australia's benchmark ASX 200 index.
The big risk for investors in the big four is that the government will take tough action to break up the banking oligopoly and revisit long-abandoned ideas to boost competition.
The consensual UK has blanched at doing so. Australia should be prepared to go further. As a minimum, rules to foster the emergence of new entrants are needed. This is a challenge that the UK has fluffed. If Australia cannot always beat England at cricket, it can at least do so in banking regulation.