Four Pillars

In today’s AFR, my colleague Ian Harper argues that the four pillars policy, restricting mergers amongst the four major Australian banks, should be dropped. He argues that the ACCC will check the competition issues and that at the moment, the inability to merge is crimping our banking sector’s ability to grow.

Harry Clarke demolishes the ‘national champions’ argument and I agree, it makes little sense. Why domestic scale should matter seems beyond me. For instance, Macquarie Bank seems to do fine without it. Growth is a natural substitute.

But what of the notion that the ACCC, or more generally, our Trade Practices Act will check the competition issues? Let’s do a decision tree. If the government keeps 4 pillars, no mergers occur and there is no change in the state of competition. If the government keeps 4 pillars, the ACCC (or Courts) decide. If there are competition issues, no mergers occur — the same outcome as keeping 4 pillars but without the transaction costs. If there are no competition issues, there are mergers.

OK, so what the government decides to happen depends on its preferences? Let’s speculate that the government would be quite happy to get the banking lobby off their backs but not to the extent of having banking consolidation. In this situation, the government would devolve decision-making if it thought the ACCC would block any mergers but would keep 4 pillars otherwise. That it has kept 4 pillars intact tells us more about its assessment of what the ACCC might do (in this case, find few competition issues) than anything else. If my speculation here is right, that is good news for Westpac and St George.

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