Wednesday, November 17, 2010

Pulling, not pushing, on strings

RBA expected rates top-up: borrowing costs
The minutes show policymakers expected banks to move by more than the official hike, and that they will factor borrowing costs for households in future decisions.
Of course the RBA did. Whose hand is up whose puppet?

The Four Pillar policy was enacted, so we are told, to keep the existing Big Four from devouring each other and thereby lessen competition. See the discussion of The 'four pillars' policy in this Senate report.

But they've worked so conveniently together that it has ended up as a bulwark against new entrants, especially foreign ones, with the typical moral hazard consequence. The feared duopoly is now the fearsome oligopoly of four.

Survey calls banks' bluff on rates rises
Analysis of regulatory figures by the Australia Institute has found banks' interest expenses have risen less than the RBA's interest rate rises over the last 12 months.

Banks have claimed that their costs have been rising by more than the official rate increases, saying they have had to lift rates above the official moves to recoup those higher costs.

A senior research fellow at the institute, David Richardson, says it has not found any evidence to support their claim.

"Their profits unambiguously have gone up, there's no doubt about that, and it looks like they've been exploiting the lack of competition as a result of the GFC," he said.

But the Australian Bankers' Association says the research is completely fabricated.

ABA chief executive Stephen Munchenberg says the RBA debunked the claim yesterday when it released minutes saying the banks' cost of funding was rising.

Why Australian Banks Need More Competition by Kris Sayce on 10 March 2009
It is taking a very long bow to suggest that because Australia maintained a ‘Four Pillars’ banking policy that has somehow saved the local banks from oblivion. In the world of cause and effect ‘Four Pillars’ is nowhere to be seen. It is a mere coincidence.

What the ‘Four Pillars’ policy has ensured is that customers are subjected to a government mandated banking cartel. This cartel has allowed them to get away with charging customers high fees. We don’t have a problem if a bank wants to charge fees, in fact we would have a problem if the government tried to legislate against it.

That is why a completely free market is necessary to make sure that companies do not have the opportunity to take advantage of a distorted market. In a market without distortions, customers would have more competition and would have greater choice to move to a bank that didn’t charge high fees. Now, there is very little choice.

So, if the ‘Four Pillars’ policy was abandoned, what effect would it have on the Australian banking industry.

For a start, they would compete with each other for customers. Would this necessarily mean the banks would take more risks? Mr. Macfarlane clearly believes the two are connected. Why competition in the banking system should be treated differently to competition in any other industry is hard to fathom.

Guambat remembers when, in the 1990's, the Australian Big Four, despite the Pillar Policy, were on their knees.

Westpac in particular was doomed, which was when Mr Packer came a courtin' and scooped it up on the cheap, then years later, doing another Bondy, he sold it back to the market.

The Four Pillars did nothing to prevent bank instability then and it is only a coincidence that it existed side by side with the Australian economy's dodge of the banking crisis bullet more recently.

It was not stable banking that saved the Australian economy over the last couple of years, it was a stable of earthly assets that China needed. Which is also why the Australian housing market does not resemble the US or London residential markets:

(Image via Barry)

Aussie banks too big to flail

Australia play bait and switch; no pillar talk

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