Michael Peters

I’ve been going through the Financial Stability Board’s report into Australia’s financial system. Alas it looks as if the dominance of the big four lenders will hurt the smaller Banks and Credit Unions, and hence ultimately the consumer.

The report says the banks face a range of policy challenges including managing systemic risk and moral hazard in a banking network dominated by four big lenders.

Judging by this, the banking oligopoly in Australia seems to be alive and well, even a long time after the GFC.

In its report on Australian banks, the Switzerland-based Financial Stability Board outlined the primary challenges for the country’s banking system. These are managing a dependence on wholesale borrowing, along with safeguarding against the systemic and moral hazard posed by a concentrated banking network.

There has been an absence of proactive public policy to infuse competition in this sector. As more mutuals merge or disappear it will only compound the oligopoly supported by the big four banks. New business will find it hard to raise funds, and that will stifle the engine for employment. We are now just left with a few financial suppliers in key markets which dominate the economy.

Australia’s banks emerged relatively unscathed from the worst of the global financial crisis but have leaned heavily on the government’s borrowing guarantee to access wholesale funding markets. And I feel it is that borrowing guarantee which could be a valuable tool to create a favourable distortion to bring some balance within the sector. The borrowing guarantee policy could attempt to distort the market in support of the smaller players without changing any bank’s risk profile. Otherwise, we will be stuck with the big four banks which in the long term will not encourage a more productive and efficient financial market.

The Financial Stability Board said in its report that promoting competition among Australia’s banks would decrease the dominance the four biggest lenders but any additional measures to bolster supervision will need to be consistent with global moves.

The mutual sectors competitive edge has diminished. This is now having unwanted consequences for mainly borrowers. The current turmoil is an ideal time to question how can policy best focus on national needs, rather than the needs of the big four stockholders. Although the report notes that the regulator APRA has performed well and that the banking system is well placed, there are many challenges on the horizon which will require careful policy planning. In short, we are not out of the woods of the GFC yet, and there are yet more risky issues for the banks to manage.

Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business.