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Issue #1428      16 September 2009

Stranglehold of Big Four banks

Global financial crisis, economic crisis, recession, government guarantees and Australia’s major banks are laughing – laughing all the way to their shareholders. The banking sector has undergone a significant restructuring with the Big Four strengthening and consolidating their monopoly stranglehold over banking in Australia. Government support during an economic crisis was the trump card in a hand that had been in play for the past few years.

As the corporate sector was licking its wounds, the banking industry was still able to boast a half-yearly profit of $7.3 billion – albeit a fall of 16 percent. The Big Four expect to report more than $15 billion in profits for the year.

Two years ago, the Commonwealth Bank of Australia (CBA), ANZ, National Australia Bank and Westpac together provided 75 percent of new lending in Australia, today the figure is almost 90 percent. In the home loan sector their monopoly on new loans is almost 100 percent! The CBA alone provides 40 percent and Westpac 35 percent of new home loans.

They have taken over other banks and home loan outfits that posed any measure of competition, all with the blessing of the monopoly-generating Australian Competition and Consumer Commission.

Westpac bought the brand name and branches of mortgage lender RAMS in 2007.The Commonwealth Bank bought up one third of Aussie Home Loans in August 2008 and Wizard Home Loans’ mortgage book in December.

Westpac took over St George bank, CBA took over BankWest and ANZ bought up the Royal Bank of Scotland’s Asian assets. Competition from foreign banks declined as most of them retreated from the loan market in Australia to deal with financial crises they faced at home.

Former Westpac CEO David Morgan summed it up: “I believe that we have seen a fundamental structural shift that augurs well for major bank profitability in the future.” He is not wrong!

Profit gouging

The banks are not shy when it comes to exploiting their monopoly stranglehold for profit gouging.

They did not pass on all the Reserve Bank of Australia’s official interest rate reductions and are talking about increasing home loan interest rates regardless of whether the RBA raises its official rate in the coming months.

Not surprisingly, their interest margins – the gap between the interest they receive on loans and the interest they pay on people’s deposits – have increased considerably. In some instances from around one percent to three or four percent. These percentages may sound small, but when considered in the light of the hundreds of billions of dollars of deposits on their books, are quite considerable.

The failure of banks to make significant cuts in interest rates on credit cards has also contributed to the profit stream.

Banks have also made a killing with new fees and by raising existing fees. They have cut costs by sacking thousands of employees, with a resultant deterioration in services to their less wealthy customers.

The private ratings agencies to which they pay considerable sums of money to be rated, strengthened the position of the Big Four by giving them AA ratings. The remaining, much smaller, banks were not blessed by the market gods with such ratings and have suffered for it and so must pay more to raise capital internationally.

But it was the government with its guarantees that really saved their bacon. The Big Four benefited hugely as people seeing their savings evaporate pulled their savings from shares, superannuation (where they were old enough to do it) and other investments to deposit them in government guaranteed bank accounts.

Government guarantees gave the Big Four considerable advantage over smaller banks, as they paid less than the smaller ones under the government’s guarantee scheme on the same amount of funding.

The banks have shown little sympathy for the plight of others during the economic crisis. Small businesses to the biggest of corporations found it extremely difficult to roll over existing loans or obtain new ones as banks squeezed credit. Even where companies were making healthy profits, the banks pulled the plug, forcing them to raise money by other means or go under. They spared no thought either for the thousands of workers who lost their jobs as a result of their callous actions.

Talk of real competition in the banking sector is a sick joke as far as ordinary people and small business are concerned. The private sector have it all sewn up and are confident, with good reason, that the present government has no intention of serious regulations or controls over the sector.

Ideally, the banking sector should be nationalised, but realistically in the short term, without the constitutional changes required, they can still be brought to heel. This can be done by a number of means.

Firstly they need to come under tight regulation, with controls over interest rates on home loans, for small business, credit cards and savings accounts. Fees are another area where controls are required.

The government could and should step in. As a first step, the Communist Party of Australia is calling for the government to set up a public bank – a People’s Bank – with a strong social charter under democratic control.

A People’s Bank would provide real service to the community and provide genuine competition to the private banks, forcing them change some of their most abominable practices or lose customers. Any profits from the bank would provide government with a dividend that could be put to good use for the social well-being of the community.

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