Friday, December 09, 2011

Of oligopolies past and future

Guambat is toward the end of his short annual Sydney sojourn, where the weather has been as cruel as the economy. His attention is more closely directed to the Aussie news, and this item is big on his radar.

The story is about how the so-called "Big Four" or "Four Pillars" or 'bankster cartel' set their interest rates, otherwise referred to as resale price maintenance.

First, it looks at how the group have conducted their little cozy business in the past, then suggests a new strategy, characterized as a lone (pun alert) break-out by one of the four. Guambat is dubious. This is a well orchestrated monkey-see, monkey-pas-de-deu, as well choreographed as Olympic synchronous swimming (if there remains any such thing).

See what you think:

ANZ a wildcard as it leads pack
by Anne Knight
ON TUESDAY, leak-proof bunkers were set up to house four senior banking teams. They are, in effect, war rooms where interest rate battle strategies are hatched and various scenarios are accessed and tested. Two are in Melbourne - ANZ and National Australia Bank - and the other two in Sydney's CBD are occupied by teams from Commonwealth Bank and Westpac

The participants comprise the heavyweights of each business, its chief executive, finance director, the head of the retail operations, treasury, marketing and corporate affairs.

The pressure is intense. Each team watches every piece of media coverage - newsflashes, the online updates and reads newspaper commentary. They listen to every utterance from the government - the impromptu press conferences known in the media trade as door stops. But they watch their competitors' moves even more closely.

When the RBA announced a 25 basis point cut to its cash rate at 2.30pm on Tuesday the clock started ticking.

The top dogs in finance and treasury have the task of assessing how much it will cost their bank to pass on the full rate cut and how much they can save by shaving a couple of percentage points off a full cut. In order to play this game of chicken they must also understand how much financial pain/gain will be sustained by the other three.

Inside the bunkers, the marketing and retail services operatives must overlay the financial outcomes against the government backlash, PR fallout and the possibility of customer leakage.

None of the banks wanted to pass on the full 25 basis points, but none wanted to be the first to do so. There is no first mover advantage in this game. It might be unpopular to agree with the banks on this issue, but thanks to the state of offshore credit markets the banks' cost of borrowing has gone up. If they needed to wade into these wholesale markets tomorrow it would be expensive. The scenarios worked through by these war cabinets would have involved a matrix of possibilities.

They even debate whether it should be a Sydney or a Melbourne bank that moves first.

But all understand that to the extent they would fall short of matching the Reserve Bank it would be better to do so as a pack.

NAB would have been desperate to see the others pass on less than 25 basis points, providing it with the excuse to stay with the pack. But nothing this week has gone to script. Within hours of ANZ's move NAB followed, passing on the full 25 basis points.

OK. There you have the description of how the oligopoly past behaves. Now the vision of the oligopoly future, perhaps?
Yesterday at 12.30 ANZ became the first breakaway - it announced a cut of the full 25 basis points. But with the ANZ announcement came an unexpected kicker: in future it will not respond to changes in the Reserve Bank's cash rate but change its variable interest rates on its own timetable, the second Friday of each month. And, more importantly, the movement will reflect changes to its own cost of funds.

This decoupling is all about convincing consumers that the bank's cost of borrowing has little to do with the benchmark rate set by the Reserve Bank. In doing so, ANZ will be less tied to central bank settings and is more likely to move rates up next month if European debt markets remain in a parlous state. It's a clever strategy, albeit probably unpopular. It is also a game-changer.

Most consumers will not understand the significance of ANZ moving away from the Reserve Bank's rate agenda. They will just see a 25-basis-point rate cut as a win.

But the breakaway is sufficiently radical and unexpected that the rest will need to reform their strategies.

It is now a fair bet that the others will fall into line. A new pack has formed and to stay outside it would be dangerous.

Read more:

If there truly were any competitive instincts in the cartel, the ranks will break with this move. Time will tell. Guambat reckons the rank oligopoly will reform and hold as tight as the one of olde.


Further to above, consider this:

Banks damned if they do and damned if they don't
This week's apparent indecision was in marked contrast to what happened just four weeks ago.

Then, the two biggest banks, the Commonwealth and Westpac, announced within a short period of each other and not long after the RBA's 2.30pm Melbourne Cup day cut they would follow suit and reduce their interest rates

ANZ left it to the next day, leaving National Australia Bank as the odd one out by only passing on part of the rate cut - 0.20 per cent - rather than the full 0.25 per cent.

NAB was vilified, not surprisingly perhaps, given it had sought to make a virtue of being the odd one out by projecting itself as the consumers' friend just a year before with its "breaking up with the big four" home loans campaign.

In little more than a day, NAB had handed back some of its hard-fought PR gains over what appeared, in public at least, to be a miserly amount - just five basis points, or 0.05 of a per cent.

As small as that seemed, it was in fact a significant turning point in what has become a hugely competitive battle for market share

Before last month's shenanigans, NAB had been successful in grabbing market share through the use of a classic retail-style price war. And in doing so, it was prepared to sacrifice some of its profit margin to buy that volume.

But all of this has come at a cost, a factor highlighted in prescient comments made just a week ago in the Herald by banking analyst Brett Le Mesurier of brokers BBY.

"From their [NAB] accounts to September it looked like to me like it was a pure 'price versus volume' trade-off," he said. "So more volume, lower price. And you multiply the two and you end up no better from a growth perspective."

But it wasn't just about the growth or the quality of that bigger market share. It was also about the cost of funding that growth. Put simply, NAB's lower-priced mortgages have been hurting its bottom line since its own cost of borrowing is no cheaper than its rivals.

In fact, the battle in the lending market has been matched by an equally expensive fight for deposits, which has only added to the pressure on profit margins.

Read more:

As always, be sure to read the whole linked article. Much has been left out here. Guambat is still not wholly convinced that mere marketing wars constitute competition. In the classic sense, competition drives down price, and the Big Four show little ambition to do anything so brash for very long.

The very foundations of the Four Pillars Policy is to avoid the kind of price competition that would yield the kind of creative destruction of any of the existing banks that classic economics finds useful.
Bank competition in Australia is more akin to rearranging deck chairs. Which is what oligopolies do.

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Blogger Davoh said...

Doubt it. "Banking" cartels in Australia know exactly what they're doing. Australian politics (at the moment) is that Wayne Swan speaks softly - but carries a big stick.

How long that will remain is an interesting follow.

9 December 2011 at 9:44:00 pm GMT+10  

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