Friday, April 24, 2009

Does the Australian Labor Party hate competition?

"It acts that way.

The last Labor government merged the OTC with Telstra to create a dominant megaommunications company, merged Qantas with Australia Airlines to create a dominant mega-airline (specifically leglislating to block ACCC scrutiny) and began the process of privatising the Commonwealth Bank (think how much more interest-rate competition we would have now if the Commonwealth Bank had remained outside of the NAB-ANZ-Westpac cartel).

This Labor government seems hell-bent on destroying what banking competition was left.

In recent months it has waved through takeovers by the cartel of St George, Bank West, Aussie and RAMS.

The head of the ACCC said the other day he would look dimly on future requests for bank mergers. Brave of him.  He'll lie down on a track to prevent the moping up now that the horses have bolted.

So what is the government doing to protect what little competition is left?...

Bugger all.  It's euthaniasing it.

1. The big four can raise as much money as they like, government-guaranteed. The smaller banks and non-banks can too - in theory. But the government threatens to charge them so much to do that none have taken up its "offer".

2. The big four also need to hold much less capital as backing for each mortgage, which as Stephen Bartholomeusz explains, "forces down their returns on equity relative to the majors and therefore forces up their cost of equity. So, their debt funding is more expensive, where they can raise it, and their equity is more expensive."

3. And now Rudd's getting together with the big four (only) in the RuddBank, to help Westpac-Commonwealth-ANZ-NAB out of tight spots.

Great for them; appalling for credit unions, the Bank of Queensland, Bendigo Bank and whatever competition is left, and as a result appalling for us - something the Rudd government would recognise if it understood the benefits of competition.

Here's a good idea (from Christopher Joye) - stop offering the big banks government guarantees and guarantee instead the underlying assets - mortgages and commercial loans - whichever institution takes them up.

It'd establish a level playing field. Surely Labor doesn't want the playing field tilted?  Surely Labor doesn't want to stifle the benefits of competion?  Surely Labor can see that there are benefits?

And guess what? Britain has just adopted the Joye model in this week's Budget. Britain has a Labor government - one that understands and welcomes the miracle of competition.

Ever the optimist, I'm looking forward to Australia's Budget.  Perhaps it'll prove my observations premature.


Ilya said...

Peter, there is an alternative view: smaller banks and, most certainly, non-bank lenders tend to play in the riskier segments of the market (high loan-to-value, lowdocs, non-conforming mortgages) which has the effect of destabilising the system through lax underwriting standards. In other words, competition ensures a race to the bottom in terms of credit quality.

The result is that we may be better off in broader terms with fewer but more conservative and responsible banks than with a truly competitive market. This is I suspect a point of view shared by some of our regulators.

Peter Martin said...

Well then lets rate good quality mortgages (20 pc deposit etc) the same and offer them the same AAA government guarantee regardless of who funds them - a bit like pricing insurance for actual risks rather than on the basis of broad stereotypes.

Ilya said...

Yes, and Chris Joye has a point actually, assuming we believe that (1) competition in the banking system is important; and/or (2) securitisation markets need to be revived in order to unlock consumer lending.

The UK initiative addresses the second point. In the UK (and the US) securitisation is a much larger percentage of overall lending and there is an urgent economic imperative to get the money flowing again. This is a much smaller problem for Australia: a very low % of credit cards, car loans, commercial property is securitised and even in the mortgage space, it is not clear whether the demise of RAMS et al is important to aggregate lending volumes. Unlike the US, the banks here have been able to take up the slack.

There is a wider issue here of whether we need to further encourage consumer debt in this country at all but I will this for another day.

Which brings me back a full circle to competition. I am just not convinced the government believes this is important. I suspect, they and the regulators (other than Graeme Samuel) would be quite happy to see the four majors dominate if that ensures stability.

herman said...

Chris Joye doesn't understand that securitisation markets died for a reason.

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