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Banking And Australia

October 16th, 2007

There is no doubt that we have one of the most profitable banking sectors in the world, but is it the most efficient? When Paul Keating gave the banks freedom on setting charges, in return for reducing credit card interest rates, he obviously didn’t know what he was doing. Initially, the move was revenue neutral, but as the banks developed their creative talents and devised new areas for charging fees, their profits took off. One would like to think that the profit increases were reward for increased efficiency and service, but the facts would not support this. The ability of our banks to raise fees has been the driving force. This is a product of the near monoply situation enjoyed by our “big four” banks. Moving your business from one bank to another is not a simple arrangement as there are overdraft arrangements, credit cards, mortgages and monthly standing charges to be considered. The thought of reorganising these is a disincentive, particularly when the alternative offers a very similar deal.

There is no evidence of any price fixing arrangements between the “big four”, but when we consider how they dominate, it is not necessary. When one bank thinks of a profitable new charge, the others hear about it and soon match the charge, knowing that their customers are unlikely to leave them.

Despite this semi-monoply position, the banks want more power. The outgoing managing director of Westpac is the latest to talk about the ‘big four” being allowed to merge – thus, reducing further what little competition is left in the domestic banking sector. Like most of his peers, he made no attempt to detail any benefits which Australia, or the Australian public, would get from the mergers. I noted, without too much surprise, that the media reported but did not analyse what he said. That, in itself, would suggest that the ‘big four’ are already too powerful. Any mergers must be resisted. It might make life easier for the senior bankers, but the ordinary person would suffer. Monopolies never lead to efficiencies, since profits can be grown by increasing charges. The deregulation of the last 15 years has already given the banks too much power and I believe the current situation should be re-evaluated, but not in the direction suggested by Mr Morgan.

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1. it seems to me that when an industry is deregulated it means we pay more for the services.

   Comment by geoff.jacobsen — October 18, 2007 @ 7:33 am

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