Feb 222008

This is an interesting article and harkens back to past posts I’ve made on the credit crunch and finance industry in Australia.

Australian finance industry participants have operated in a cone of silence for years. Ever since de-regulation in the late `80’s, banking and finance in this country has become a more and more exclusive environment. You’re either a member of an elite club, ie: one of the majors, or you’re on the outer looking in. Some of those who wound up on the outer, such as St George, Suncorp, Bank of Queensland to mention a couple, decided they wanted in and so went around buying up the odd outsider, eventually getting big enough to qualify for membership. The divide these days is as broad as it’s ever been. The only barrier to it becoming a yawning chasm is the ‘Four Pillars’ policy.
Google ‘four pillars policy’ and you’ll get a slew of stories over the past decade where each of the four pillars – Commonwealth Bank, ANZ, Westpac and NAB – will complain bitterly about it, or in the case of the CBA, praise it. Each has a rationale for it’s position. I find it extraordinary that this four pillars policy can still exist in an environment where market forces are mooted to be the be-all and end-all in self-regulation of any industry. Former governor of the Reserve Bank of Australia, Ian Macfarlane said as much. If indeed that is the case, why then does the four pillars policy still exist?
I’d suggest that the four pillars still exist as a regulatory mechanism, as opposed to a market restraint. It’s both, clearly, but primarily, I’d say it’s a regulatory mechanism because it limits the capacity of each pillar to grow. That has to be a good thing in the longer run. Were the policy not in place, Australian finance would be dominated by either a monopoly or duopoly of major institutions of massive capacity and by inference, control over the industry. When one considers the difficulties each pillar has managed to expose themselves to in relation to the US sub-prime business, most of which have only been alluded to through higher than RBA-sanctioned rate rises over recent months, it doesn’t take much imagination to consider the depths to which a truly massive finance house could fall were such a beast allowed to exist.
So, my question is, why do we still have a regulatory body in the Australian Prudential Regulatory Authority, if major finance houses which said body is meant to be keeping a prudential eye on, as it’s name implies, can manage to get themselves into difficulties which wind-up costing Australian tax-payers more than shareholders. We haven’t seen the real meat of the sub-prime fallout as yet, and may not for another twelve months or more. The hammer of monetary policy is currently being applied to the Australian economy, and utilised by the major finance houses as a vehicle to recover losses incurred through that crisis. Now we are starting to see the fruit of imprudent lending practices, or ‘investments’ by major finance houses into organisations like MFS, Centro and Allco starting to surface. Where has APRA been all this time?
Is it time for more reform in Australia’s domestic finance industry? Is it time to end the Four Pillars Policy? Is it time to bring in more relevant regulation to encourage prudency in financial dealings? I’m of the opinion that it’s past time. I wonder what others with more of an economic bent might think?