Over the past few weeks, I have been rather critical of the state of financial regulation in Australia. A banking scandal earlier this month revealed how a system of government guarantees to protect the largest banks has destroyed the incentives to appropriately serve customers and shareholders. Instead of recognizing this, the head banking regulator recently warned against shifting to a state of greater financial competition, citing the common myth that “too much competition can destabilise the financial sector.”
Now, it seems, there is some good news. The Australian Competition and Consumer Commission (ACCC), the competition watchdog, is concerned that the largest four banks’ profits are being boosted by anti-competitive regulations instead of their own superior services. In a statement, the ACCC noted: “It is not clear that sustained high profits of the large banks can be traced to exceptional performance. … To the contrary, there appears to be an element that reflects the degree to which the competitors of the large banks are handicapped in their ability to effectively contest the market.”
The ACCC has asked a federal government agency to investigate whether these regulations could be restricting competition from smaller rivals and new challengers.
This shift in perspective comes as welcome news. As I outlined earlier this month, the Australian government has propped up the country’s largest banks through its “Four Pillars” policy. The policy maintains the separation of the four biggest banks—Commonwealth, ANZ, Westpac, and NAB—by making them immune from takeover. This includes protection from foreign competition and an array of subsidies and implied guarantees. Most critically, the Four Pillars policy is an implicit promise of bailouts to the largest four banks, granting them the much desired status of “too big to fail.”
Removing these government subsidies and protections propping up the Big Four banks will not only force them to vigorously compete for customers, but it will make them more accountable. Knowing that a taxpayer backstop isn’t there to protect them will force banks to focus more on ensuring safety and soundness. Shifting to a system of financial competition without reliance upon government protection can lead to a more efficient and stable sector. It’s encouraging to see Australia finally embrace such an approach, and hopefully the United States can follow a similar path.