Evan Jones

Fairfax’s business journalist Stephen Bartholomeusz has a piece in Friday’s Sydney Morning Herald on the federal government’s ‘four pillars’ policy.

Introduced by Paul Keating but carried over by Peter Costello, the policy prevents any of the big four Australian banks from taking over or merging with another. Costello is hardly the bank-basher, but he just couldn’t face the public backlash.

As SB points out, this policy is a perennial catch cry by chief executives of the four majors. David Morgan, Chief Executive of Westpac, has just become the new Chairman of the Australian Bankers’ Association. Thus, Morgan has apparently felt that it was de rigeur upon his elevation to raise the old bogey again. If there was ever a prick of a lobby group it is the Australian Bankers’ Association (though admittedly that was before the Property Council of Australia came along). Abrasive and ungiving to a fault.

According to SB:

[Morgan] said the ban on mergers stymied the ‘immense possibilities’ for Australians in having Australian-owned banks with global scale, and that they should be treated the same as other corporations from a competition policy perspective.

You have to admire the chutzpah of banking executives. Morgan was a senior Treasury official before he jumped ship and joined Westpac in 1990. Morgan would well know that Westpac stuffed up royally in its attempt to become a global player (read Edna Carew’s 1997 Westpac). Westpac’s merchant bank Partnership Pacific was an A1 disaster area. The NAB has also burned itself seriously in the US (e.g. the Homeside disaster, in which $4 billion went down the tubes), in Ireland (corruption, incompetence) and Great Britain (head office indifference to the local market). ANZ has been burned, but its long-term involvement in Asia has shown more commitment to understanding the peculiarity of national markets.

SB points out the obvious:

This is a small market dominated by four large institutions. If four became three there would be great pressure, in the name of equity, for three to be allowed to become two. The implications for competition of big bank mergers, despite the emergence of serious new competitors, would be unpleasant.

SB notes that ‘the remaining duopoly’ at best would be benefiting offshore customers or shareholders but not Australian consumers. He also highlights the prudential risk – the two big banks could not be allowed to fail.

Morgan, like his predecessors, is talking pure self-interest. The big four have been squeezed on a number of fronts, from mortgage brokers, new banks offering better deposit rates, etc. And they are right that the big American banks have gone from mega big to mega mega big because of a non-existent anti-trust policy towards the banking sector.

But what Morgan wants is more carte blanche to dictate terms to the domestic markets, not to serve them better.

We’ve already had takeovers and mergers aplenty. With the threat of deregulation in the early 1980s, the Melbourne based National Australia Bank took over the Commercial Banking Company of Sydney and the Bank of New South Wales took over the Melbourne-based Commercial Bank of Australia. Westpac (after changing its name from the Bank of New South Wales) has taken over a number of small regional banks (ex building societies) – Challenge in Western Australia and the Bank of Melbourne. The Commonwealth got the State Savings Bank of Victoria (it was on its knees but the Commonwealth still got the deposits and the infrastructure); then the Commonwealth gobbled up Colonial. The recent takeovers should never have occurred. How much is enough?

The big banks have always wanted to rule the finance sector by right rather than by service. Much innovation in the finance sector has come from outside the big private trading banks, including from government-owned institutions. Now that successive governments have killed off or privatised the public institutions, the big banks (now including the once public Commonwealth) want to knock off competition by takeover and keep the profits rolling in through market control.

The small and medium enterprise segment is the acid test. The big four have approximately 80% of SME transactional business, and generally the other more important credit needs follow the transactional business.

The big four don’t deserve this percentage, but the SME’s feel reluctant to change banks because the offerings are generally the same. And the offerings are indifferent.

The big four treat SMEs as cannon fodder. Unconscionable conduct, even fraud, towards SME borrowers is on the cards if borrowers give their lender just a mere whiff of a chance to take them to the cleaners. There are many casualties in the subs and in the bush who have to suffer in silence because no one will give them the time of day.

If any of the four big banks were to take SME borrowers seriously, the SME segment would be knocking down the doors to get in. Banks don’t need mergers to achieve security. They can do it by giving the borrower functional and honest service. This simple point hasn’t occurred to Morgan.

Morgan moved into a bank, Westpac, that was at the core of the foreign currency loans scandal. Westpac, the Commonwealth and the ANZ forced a dodgy product onto unsuspecting small business borrowers, who generally knew nothing about international finance (neither did the bankers themselves at that stage).

Morgan, as a senior Treasury official, would have known well what the banks were up to, that they were breaking guidelines on domestic lending limits, for example. that they were screwing withholding tax out of them (an additional 10% on the interest charge) and then (in all probability) not handing the tax receipts over to the Tax Office. But the Treasury and the Reserve Bank sat back and did nothing, and several thousand small business families went down the gurgler.

There are still foreign currency borrowers out there looking for closure. Morgan could get a better hearing on the four pillars issue if he could show he and his banker cohorts were prepared to sort out the running sores – to do a ‘reconciliation’ with aggrieved borrowers.

Morgan and Westpac’s Chairman, Leon Davis, spend a lot of time talking about corporate social responsibility, and basking in being top of the league table on that score. But it’s all PR. All froth and little substance. I corresponded recently with Morgan (copy to Davis) about Westpac’s abysmal treatment of a foreign currency borrower, nothing that perhaps Westpac should align its public status for social responsibility with its innermost practices. No reply and no action.

Reminds me of the Knights of Labor, that utopian labor organisation started in the US in 1869. It accepted all workers (revolutionary for the time – women, blacks, etc.) except for bankers, lawyers, stockbrokers, doctors and liquor manufacturers. A bit tough on the doctors, but you can understand their frame of mind. When a banker speaks, watch out for your wallet.