Australian bank merger talks put pressure on four pillars

-- Nathan Lynch,, May 13, 2008

THE AUSTRALIAN GOVERNMENT'S "four pillars" policy has come under fire once again following the merger talks between Westpac Banking Corporation and St George Bank, which were announced late yesterday. Under the long-standing four pillars policy the Australian government has refused to allow mergers between the country's four largest banks: National, ANZ, Commonwealth and Westpac. Industry sources told Complinet that the merger discussions highlighted the absurdity of "four pillars" framework, which was drafted long before St George became a major force in Australian banking.

The four pillars policy emerged in 1997 following a review of the "six pillars" financial services competition policy, which prevented mergers between the four largest banks and two major life insurance companies. After the Financial System Inquiry in 1997, the government excluded the two life insurance companies but continued its policy in relation to the four largest banks. The policy is premised upon the Treasurer's powers under Section 63 of the Banking Act, as well as the Australian Consumer and Competition Commission's powers to override mergers in the interest of maintaining levels of competition in the banking sector.

The announcement late yesterday that Westpac was in merger talks with St George reignited the debate surrounding four pillars, especially in view of the banking market changes since 1997. The A$19bn (US$17.9bn) merger, if successful, would create Australia's biggest bank by market capitalisation and the second biggest by assets. The merged entity, which would continue to operate both brands simultaneously, would be valued at around A$63.7bn (US$60.2bn) based on current share prices.

A source at an Australian industry association said that the "four pillars" cut-off limit seemed like an arbitrary threshold in view of the growth of a "second tier" institution such as St George to its position as one of the so-called "big five" over the past five years. He added that it was ironic that the domestic competition policy would not prevent an overseas bank from launching a takeover bid for one of the "big four". He said that the biggest obstacle to this, at present, was the perception that Australian banks were over-valued when compared with their international counterparts, which made them less attractive as acquisition targets.

Growing chorus

The leading figures in the big four Australian banks have been vocal in their criticism of the four pillars policy in recent months but have failed to gather public support for their cause. ANZ chief executive Michael Smith said when he joined the bank late last year that the policy had outgrown its usefulness and, rather than adding stability to the system, was instead breeding an inward looking banking industry.

"I believe it is in Australia's national interest to move beyond the 'four pillars' policy and allow the banking system to be subject to the same competition policy that all other Australian businesses face," Smith stated. Westpac chief David Morgan has described the policy as a "pointless retardant" on bank growth. National Australia Bank chief executive John Stewart, meanwhile, said it was inevitable that the policy would eventually be scrapped -- despite the reluctance of politicians to address the matter.

David Bell, chief executive of the Australian Bankers' Association, said that his organisation could not comment on the merger talks between Westpac and St George -- both of which are ABA members -- as he had not been privy to any discussions and had only been observing it at a distance. He noted, however, that the ABA had been opposed to the "four pillars" framework for some time and this position had not changed.

"The ABA opposes the 'four pillars' policy on the grounds that banking industry consolidation should be treated on its merits as governed by the Trade Practices Act. This is not an argument for or against consolidation but simply a matter of sound principle," he stated.

Arbitrary lines

Professor Robert Marks, of the Australian Graduate School of Management, said that the merger talks between St George and Westpac had highlighted the arbitrary nature of the four pillars cut-off point. Professor Marks released a research paper two years ago highlighting the "fallacies" surrounding the four pillars policy. He argued that "four pillars" had not become any more defensible since that research was released.

Professor Marks told Complinet: "I think that four pillars was a misguided policy, let's put it that way. It was probably introduced on populist grounds to allay fears -- after the six became four -- that this consolidation was an inexorable process. People were concerned about banks growing in size and possibly being overtaken by foreign banks. I argued in that earlier study that on those grounds alone the policy was ineffective and I've seen nothing in the two years since that has led me to change my mind."

Professor Marks said that the ring-fencing around the four largest banks dated back to 1997, when the big four were streets ahead of the others in terms of market share. Since then the banking landscape had evolved, with St George growing significantly, but the "four pillars" policy remained fixed.

"The announced merger underlines the fact that there was a degree of arbitrariness in terms of having four banks quarantined from any sort of takeover rather than five, for example. Of course, if it had been a 'five pillars' policy then these discussions now wouldn't be happening. The upshot of the merger between Westpac and St George -- if indeed it goes ahead -- is that the remaining three banks will think that they need to expand as well, even though they can't look towards each other," he said.