Markets which are categorized as oligopolies are distinguished by few sellers offering near identical products. Typically, these markets have high barriers to entry and exit, while the behaviour of each firm depends on the predicted behaviour of the other firms in the market. Taking these criteria into consideration, it is fundamentally clear that the Australian banking system is an oligopoly. The “big four” in Australia (being National Australia Bank, Commonwealth Bank, Westpac and the Australia and New Zealand Banking Group) dominate the domestic banking industry.
It is not unusual for a nation’s
banking system to be an oligopoly. Given the characteristics of banking and how
it lends itself to better-known names, economies of scale and small margins at
the retail level, it is somewhat inevitable. Australia is not alone in having a
“big 4” banking oligopoly. Similar oligopolies exist in countries ranging from
Ireland to Sweden to China. Even a study
by Beck and co. in 2003[i] cited the examples of
Norway and Finland – considered in anecdotal terms to be equitable societies
with well-functioning economies – whose largest 3 banks had industry
concentrations of 84% and 85% respectively.
In the same study, the authors note
that high concentration in itself is not necessarily a bad characteristic for a
banking industry to possess. They note that high concentration leads to high
stability in the banking industry. In particular, they noted that a
concentration level of 72% or above could be directly correlated with fewer
occurrences of banking failures within the particular country. They argue that
large banks are easily diversified, which allows them to spread risk (and
therefore, attain lower overall risk) across several sectors of the banking
industry. Also, the authors state that a concentrated group of bigger banks
should be easier to monitor than a fragmented group of smaller banks.
In addition, a report in Australian
Banking and Finance from late 2013[ii] notes that the big 4
banks in Australia, have “scale advantages, cost advantages, efficiency
advantages, investment advantages, capital advantages – flowing from their
ability to use internal ratings based capital allocation against assets,
funding advantages, competitive advantages and so on.” The report also states
that they dominate in an oligopoly that gives them “a durable structural
competitive advantage.”
That is not to suggest, however, that
the oligopoly was a planned measure by bureaucrats with a long-term vision for
the Australian banking system. Like most other countries experiencing similar
levels of concentration in the banking industry, Australia’s oligopoly came
about through a long process – central to which was deregulation.
Giving
Historical Context to the Australian Banking Oligopoly
The Australia Institute Paper of 2012,
“The Rise and Rise of the Big Banks,” examines deregulation of the Australian
financial system in some detail. This process began in the early1970s and
continued right until the early 2000s, by which time the industry had undergone
extensive change. Predictably, the major outcome of this change was huge
consolidation in the banking industry in particular. The paper notes that in
the 1980s, banks controlled around 50% of the financial industry but currently,
that figure stands at around 90%.
Banks, which were previously rather
one-dimensional entities, through a long process of deregulation started by the
Hawke government at the beginning of the 1980s, have swallowed up other niches
in the financial system, which catered for different niches, such as credit
unions, building societies and financial co-operatives. The government and the
central bank decided to move away from the old system in the 1970s for a few
reasons[iii]:
i)
To
allow banks to better respond to consumer needs. At the time, banks were losing
market share in the financial system, falling to as low as 40% from a previous
high of 70% in the 1950s.
ii)
To
make the financial system (slightly?) more centralized and thus, easier to regulate.
iii)
To
allow banking authorities to engage in large foreign exchange transactions and
better manage domestic liquidity by stabilizing the foreign exchange rate.
iv)
To
bring greater efficiency to the financial system in terms of better interest
spreads, innovation and access to credit lines.
All of the aims were achieved with
varying degrees of success. Point (ii) does raise the question about where
regulation should have stepped in once more to stop the oligopoly of banks
arising. Whereas the debate in other countries has centred round how to
diminish the influence of banking institutions (and therefore, their size) in
Australia, 24 years of solid growth has led many people in places of political
power to believe that the oligopoly that exists may be more of a strength than
a weakness.
Political
Support for Oligopoly in Australia
Whereas the political class might be
expected to oppose oligopolies (and probably do when the moment suits), the
success of the Australian banks seems only to have made them national champions
in the eyes of the country’s politicians. In August 2013, opposition finance
spokesman Andrew Robb courted controversy when he claimed to support oligopoly
in the financial industry. He told one delegation, “we are an oligopoly
community. We shouldn’t fight it. We should make the most of it. It does
provide us with the critical mass and the size and innovation and for that
ability to compete with overseas countries.”[iv]
There might be something to Andre
Robb’s comments, rather than just point-scoring with the powerful financial
industry (which is three times the size of Australia’s GDP). Australia has
given rise to oligopolies in a number of industries. Could it be that its size
(and lack of any natural competitors from outside, being an island) is a factor
in determining oligopolies in each industry? The media, grocery and telecoms
industries are also characterized by oligopolies (although a system fault in
any of the others would not be as catastrophic as one would be for the banking
industry).
Nevertheless, the political support
extends from politicians themselves to the central bank, the Royal Bank of
Australia. This semi-political institution, has – in the words on one
Australian commentator – “bent over backwards during the last 24 months to defend
the concentration of Australia’s banking market.”[v] It seems a consensus has
been reached between government and the Royal Bank of Australia that because
Australia avoided the brunt of the global financial crisis and its banks in
particular remained unscathed, that the banking system is fine in its current
oligopoly form. They seem to be saying that if it’s not broken, don’t fix it.
While Australia’s banking system as at
2014 is lightly regulated, policymakers could well benefit from looking at
financial crises in various countries in the past five years and learn from
them. In this case, the adage “prevention is better than cure” may be more
appropriate than “if it’s not broken, don’t fix it.” For example, the report
into the Australian banking system conducted by the Australia Institute in 2012[vi], begins, “the Australian
banking industry is the most concentrated in the world and also the most
profitable. In fact, the ‘big four’ Australian banks make up four of the eight
most profitable banks in the world.”
It’s not difficult to see why there
are such large profits at the “Big 4” Australian banks, when one considers how
they have shared up the market between them (see Table 1 below).
The same paper mentions that,
“examinations of the top 20 shareholders of the banks’ annual reports shows
that, on average, over 53% of each big bank is owned by shareholders that are
among the top 20 shareholders in all of the big banks.” Further evidence in the
report shows that the next biggest banks exhibit similar shareholder stakes. It
could be suggested that this points to more of a monopoly than an oligopoly. In
addition, all their business models are nearly identical (relying on wholesale
loans for most of their business), giving further weight to the existence of an
effective oligopoly.
Consequences
of Australia’s Banking Industry Oligopoly
As with any industry, high industry
concentration in banking leads to low levels of competition and higher prices
(i.e., the consumer stands to lose out). In addition, higher interest rates are
often the by-product of high levels of bank concentration. The 2009
best-seller, Too Big to Fail by Andre
Ross Sorkin chartered the catastrophe occurred when a highly deregulated
banking system becomes too centralized within a small numbers of banks.
Australia escaped the brunt of the global financial crisis not because of
financial prescience, but rather because it was (and still is to a lesser
extent) undergoing a mineral extraction boom. It is important not to forget
this in the context of the banking system in particular.
A 2012 IMF report which examined
Australia’s financial industry[vii] noted: “a higher capital
threshold for the systemically important institutions may be desirable to
further bolster financial system stability. The four major banks are
systemically important, which imposes a negative externality on the domestic
financial system. Significant and protracted difficulties in any one of them
would have sever repercussions for the entire financial system and in turn, the
real economy.”
The report goes on to state, “the
Basel Committee considers it appropriate for supervisory authorities to conduct
more intensive supervision and require additional capital of systemically
important institutions.” Elsewhere in its recommendations, the IMF Report that
there is a moral hazard inherent in having such a highly concentrated banking
sector. This mirrors the concerns it laid out about the American banking sector
before the financial crash in August 2008. It suggests some ex-ante funded
deposit insurance, which the banks should put up themselves.
The issue here is that what the IMF is
suggesting goes against the grain of what Australian banks and the financial
regulator are doing. The oligopoly in the Australian banking system will likely
cause some problems for the economy further down the line. As we have seen,
there exists a clear oligopoly, which has been under-regulated and may begin to
over-compete with itself in order to gain market share in a market which will
stop growing sooner or later.
As for breaking up the banking
oligopoly? It would seem that Australia has learned little from the experience
of America. In November 2013, the government launched a “root and branch”
review of the Australian financial system[viii] (i.e. its banking
system). The aim of this review is to “make recommendations to foster an
efficient, competitive and flexible financial system, consistent with financial
stability, prudence, integrity and fairness.” Notably, these are not typically
traits associated with an oligopoly. The review will be headed by none other
than David Murray, the former chief of the Commonwealth Bank of Australia, one
of the Big 4. This is analogous to Goldman Sachs officials running the Federal
Reserve at the time of the US financial crash. Plus ça change.
[i]
Bank Concentration and Crises, NBER Working Paper 9921, Beck, Kunt and Devine
(2003).
[ii] http://www.australianbankingfinance.com/banking/major-banks-enjoy-structural-advantage/
[iii] http://www.rba.gov.au/speeches/2007/sp-dg-160707.html
[iv] http://www.theaustralian.com.au/business/companies/we-are-an-oligopoly-economy-robb/story-fn91v9q3-1226699531519#
[v] http://www.businessspectator.com.au/article/2010/5/21/interest-rates/time-blast-banking-oligopoly
[vi]
The Rise and Rise of the Big Banks, Technical Brief No. 15, The Australia
Institute, December 2012.
[vii]
Australia: Financial system stability report. IMF Country Report No. 12/308,
November 2012.
[viii]
http://www.smh.com.au/business/the-economy/former-cba-chief-david-murray-to-head-review-20131121-2xwdp.html
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