Oligopolistic behaviour in the banks

It’s absolutely no news to readers that Australia’s big banks enjoy monopoly rents. And to that extent a new study by the Australia Institute, called The rise and rise of the big banks, is borderline hackneyed. If you’ve been living under a rock and were unaware of the lack of competition, then the following chart aught to clarify it for you:

Now that is what I call “too big to fail”!

But the study does actually break new ground in examining the ownership structures of the big banks, where is discovers an equally obvious concentration in the big four:

And the next tier of competition:

The study concludes:

With respect to price leadership, until recently the banks let the Reserve Bank act as the price leader but in February 2012 the ANZ took on that role. The dominance of the big four banks in the market makes it easier to develop informal understandings that they will not unilaterally reduce prices. But the decision by the NAB to break ranks was seen by some of its investors as a threat and they urged it to move back in line with the ‘competition’. To understand the degree of competition in the banking system it is important to understand bank ownership. This paper presents evidence on the pattern of bank ownership in Australia.

An inspection of the top 20 shareholders in the big four banks reveals a very interesting pattern. On average, over 53 per cent of each big bank is owned by shareholders that are among the top 20 shareholders in all the big banks. Most of the owners, and certainly the top four shareholders, are nominee companies. Nominee companies hold shares on behalf of other entities that for some reason want to hide their identity. They tend to be both foreign investors and fund managers; increasingly they are investors acting on behalf of superannuation funds.

The common ownership of the big four banks seriously challenges the idea that there are four separate big banks in Australia. Given the common ownership of the big banks, it is to be expected that the owners will put pressure on the banks to act as one and reap the monopoly profits. That seems to have been the motive of the investors who encouraged the NAB to move back in line with its competitors. Moreover, ownership figures for the second tier banks, the big three regionals, show they are also owned by the same organisations that own the big four.

I spend much of my time oscillating between the obvious need for a root and branch banking inquiry and the near certainty that said endeavour would be hijacked by vested interests and turned towards another round of competition that would result only in cheaper and more abundant credit, not cheaper banking services. This morning I side with the former.

TB 15 the Rise and Rise of the Big Banks

David Llewellyn-Smith
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Comments

  1. Unfortunately the only solution is to require the banks to sell portions of their operations and the only place this has happened is in the UK when RBS was forced to sell branches as a consequence of being bailed out. Not a great outcome is it; we are stuck with an oligopoly until it fails and then the public picks up the pieces.

  2. And when one considers that according to the RBA, over 38% of the banks’ “Assets” are in the form of residential loans, it is easy to see why money electronic-digit-lending-at-usury is fundamentally immoral and should be banned.

  3. “For example the big four banks spend huge amounts on advertising and no doubt much more on designing newproducts and processes.”

    Peter Drucker famously said that the only innovation in retail banking in the USA since the War was the credit card.

    In Australia’s case, it would be the ‘fixed:variable rate’ mortgage (early 1990’s). Since then?

    Phhhhtttt…… *

    Innovation in retail banking is solely around new distribution channels (phone, then Internet, now mobile).

    * arguably, the only ‘innovation’ they share (naturally!) is withdrawing from lending to small business

    • Yep. When they fix rates for 15 or 30 years for the mortgage market like they do in the US, then we might be getting somewhere.

      A variable loan over 30 years and takes me chances with the debt merchants? No thanks.

  4. There seems to be some view that the merger and merger of Australia’s banks, culminating in the current big 4 is something akin to the vow of marriage “Let no man put asunder” as though their existence rests on some divine right.

    Solution:

    i) Ban ADI’s and their holding Co’s from operating Superannuation Co’s, forcing them to divest the likes of BT, MLC, etc; and

    ii) Require each of the big 4 to de-merge into two equal separate entities.

    Of course the vested interests and the biggest potential loser’s (ie the 4 banks CEOs and executive teams) would squeal like stuck pigs, but time an again it has shown if you truly want to unlock shareholder value de-mergers are the way to go… eg US Bell and the resultant baby Bells.

    However this would require visionary political leadership… in Australia we’re more likely to see intelligent life evolve from the Bondi sewerage works than for it to emerge from our political cesspool.

  5. “But the study does actually break new ground in examining the ownership structures of the big banks, where is discovers an equally obvious concentration in the big four”

    These are all nominee/custodian companies, and so they hold the shares on custody for someone else – usually a fund or other institutional investor. So their holding will represent a large number of underlying investors with their own views and voting intentions.

    A pretty embarrassing and rookie error by the AI in my humble opinion.

    n.b. fund managers use custodian companies to hold the assets of funds not to hide their identity but to reduce the risks of someone fraudulently making off with the fund’s money – the custodian is interposed to make sure assets are properly separated from the manager and are only applied for approved purposes.

    • Royale With Cheese

      Yep, companies on the ASX have to disclose the top 20 holders and anyone who has an ultimate controlling interest in over 5% of their shares in their annual reports.
      For what its worth, I just checked the 2012 annual reports for the 4 banks and none of them report that any one entity controls over 5% of their shares.

  6. Mega Bank exists because government policies combined with benefits to regulators, bank shareholders and management meant that there was no party with the power and incentive to prevent it.

    Australian society, borrowers and small business are the big losers.

    Nothing will change until the system failures start to publicly show although behind the scenes this is already showing.

    Maybe now that the RBA is looking at up to $500Bn of mortgages ending on its balance sheet within a few years, there is an incentive in that organization to look at the systemic risk created by Mega Bank

  7. It is clear that heavily oligopolistic/duopolistic industries and their players operate in a way which leads to increasingly concentrated sectors which eventually become less price competitive when there is no viable competition.

    Thank goodness for Optus (20 years ago), Aldi, Costco, Masters (although it will be further end of independent hardware) etc and to all the independent fuel operators. An 8c Coles/Shell voucher gives a net saving of 2c/litre over the local independent. It is a misleading and predatory pricing structure by Coles/Shell in my opinion.

    All around the world the FIRE economy has come to dominate western economies, to the detriment of us all in my opinion.

  8. Banks should be paying a franchise fee to the taxpayer. 40% tax rate and a turnover royalty should cover it.

      • Sure! $250 Million a agbove you get stung like 80%.

        I see the advantages of:
        -Will reduce the risk of a ‘too big to fail’ scenario.
        -Will allow competition to flourish as more competitors are in the same space hopefully doing different things.
        -Raise tax revenue.
        -Smaller projects would mean a distribution of risk across projects (avoid blowouts a la Gorgon)
        -Incentive for companies to maintain a focus on core businesses and running it as efficiently as possible, rather than the never-ending growth mantra.

  9. Meanwhile….

    http://blogs.wsj.com/dealjournalaustralia/2012/12/07/cba-tops-100-billion-worth-more-than-germanys-banks/

    “CBA’s shares this week reached a record 61.33 Australian dollars (US$64.27) versus A$49.75 at the beginning of January.

    That means Australia’s largest lender now has a market value of more than US$100 billion dollars, more than the entire banking system of Germany, Singapore or Italy, according to data from the Datastream Global Banking Index.”