Rudd Makes It Too Easy For Big Banks

Sydney Morning Herald

Saturday October 18, 2008

ALLAN FELS & FRED BRENCHLEY

Adapting Kerry Packer's famous quip, the big Australian banks will only get one Kevin Rudd in their lifetime. And they are making hay, emerging as the most underwritten and overprotected companies in Australia.

Faced with a global economic crisis, Rudd hasn't just ditched his populist rhetoric about big banks passing on full interest rates cuts, although he has kept the heat on over executive salaries. He has guaranteed the banks' domestic and foreign deposits and - amazingly - handed them on a plate acquisition of their smaller competitors.

Westpac has already swallowed St George. Commonwealth is lining up BankWest, and Suncorp Metway is being eyed by the big predators. The likelihood is that Australia will have few, if any, regional or small banks, but four goliaths.

Rudd appears unfazed. When asked about the prospect of less competition amongst banks, he replied: "My first responsibility as Prime Minister of the country ... and the Treasurer's too ... is to maintain the stability of the Australian financial system. And if this becomes a challenge or an apparent conflict between stability and competition right now, this Prime Minister and the Treasurer ... will be backing stability first and foremost. Competition questions can be resolved over time".

Wrong, Prime Minister. Competition needs vigilance. Companies allowed to take dominant positions become inured to competitive pressures, as we have seen with telecommunications and supermarkets. If competition flourished by itself we would not need a Trade Practices Act. In the current global turmoil when governments are guaranteeing deposits and even part nationalising banks, Rudd's instinct to bolster the major Australian banks is understandable. But there is a difference between building confidence and creating oligopolies.

The "get big" invitation runs counter to other Rudd policies. Rudd, for instance, plans legislation against creeping acquisitions, the very thing the banks are doing now. The Government also plans to inject $8 billion into mortgage securities to help small players compete against the big banks. Banking consolidation will make it much harder to compete.

Deliberately opening the small banks to takeover sits incongruously with the four pillars policy. The big banks are protected from takeover, but the small players are not.

There is another danger in opening the shooting range on small banks. The current Australian Competition and Consumer Commission is politically well attuned, as witnessed by its handling of petrol and grocery prices. Will regional bank takeovers now get through despite the commission singling them out for praise in "challenging" the majors when it approved the Westpac-St George merger?

The banking market after the crisis will require more, not less, competition. Banks will be more cautious lenders. Without competition, small business borrowers will suffer. Exposing the smaller banks to takeover is a precursor to perhaps even greater concentration. With Commonwealth and Westpac now head and shoulders above NAB and ANZ, pressure will come from the latter two to end four pillars to allow them to merge to match their bigger rivals.

There is another way for Rudd to deal with both bank confidence and competition without the seeming panic move of throwing the smaller banks to the winds. With more bank takeover bids now likely, the Government could issue a directive to the commission, as it is legally entitled to do. This could make several points.

First, the Government could make it clear that in the current turbulence it is anxious to see a secure banking sector to bolster public confidence. It could point out that this has largely been achieved through the deposit security guarantee. Second, it could stress the importance of maintaining competition to benefit home buyers and small business. Such a directive would not deal with any particular merger. Rather it would set out for the commission broad guidelines for a secure, competitive banking sector. This would strengthen the commission's competition approach when considering future bank mergers.

Now is not the time to start ditching competition policy. The Great Depression gave Australia a highly protected and government cosseted industrial sector, which has taken decades to wind back. It would be a pity if the crash of '08 revived that style.

© 2008 Sydney Morning Herald

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