By Eric Johnston
PAUL Keating, former prime minister and architect of the nation's four pillars policy, has criticised the Government for delivering too much power to the major banks.
He said there should be no more mergers between the big banks, arguing that keeping the four lenders separate would protect customers and minimise the risk of a banking crisis spreading to Australia.
Speaking to BusinessDay, Mr Keating also said wealth management giants AMP and AXA Asia Pacific must be quarantined from being acquired by a major bank to protect the nation's funds management industry.
The one time Labor leader and long-running federal treasurer also hit out at Commonwealth Bank's $2.1 billion move on BankWest last year, arguing that regulators should have been prepared to support the lender through the financial crisis rather than taking "the path of least resistance" and allowing it to be folded into one of the nation's biggest banks.
Meanwhile, the $1 trillion superannuation industry should play a greater role in the revival of the mortgage-backed bond market, a move that would revive a key funding stream for the non-bank lenders.
Mr Keating's comments follow intense focus on the level of competition throughout the banking sector since the onset of the global financial crisis. While Australia and its banking industry have largely steered through the crisis, the local banking market has undergone a structural shift.
The big four - Westpac, ANZ, National Australia and Commonwealth - have used their position to snap up weaker rivals from banks to mortgage brokers. And measures such as the deposit and funding guarantee, although necessary to stabilise the sector, have served to underpin the natural advantages the major banks already have over their international rivals.
The big four are now writing more than 90 per cent of the nation's new mortgages, compared with about 60 per cent before the crisis. However, analysts point out their real grip on the market is closer to 100 per cent after taking into account all the indirect lending they fund on behalf of non-bank lenders and mortgage brokers.
Now chairman of corporate advisory firm Lazard Carnegie Wylie, Mr Keating said bank regulators such as the Australian Prudential Regulation Authority should play a greater role in determining competition policy across the sector in the future.
Given their significance to the economy, banks should be fundamentally viewed as utilities and therefore be subject to heavy regulation by Canberra.
"Banks had modest capital for their level of risk compared to other industrial companies; that is why their rates of return are so much better,'' he said.
''They were able to operate like this because they had recourse to the Reserve Bank's discount window and the fact that the likelihood of the government letting any of them go insolvent was low.
"I always believed they were utilities and they took greater risks given the amount of capital. So I made four boxes for them and put each one in it.''
He said there was little of scale the big banks could buy, but with speculation that ANZ could attempt a transformational move in wealth management, Mr Keating said the superannuation industry - a key driver of the Australian economy - needed further protection from consolidation.
In the lead-up to the financial crisis there had been calls by several bank chiefs, including from Westpac and ANZ, for the scrapping of the four pillars policy.
A Senate economics committee has recently urged the Government to turn into law what currently remains a policy of the Treasurer in restricting mergers between the big four.
Market analysts say National Australia Bank and ANZ now face being left behind in terms of market share from dominant Commonwealth Bank and Westpac. But Mr Keating said the standard argument among banks has been to argue for one more merger, resulting in three major lenders.
However, this risked the banking landscape being determined by which chief executive wanted to move first in an acquisition.
"A first mover advantage is not much of a public policy … so by keeping them separate it puts a suture on tomfoolery," Mr Keating said.
Preventing the big four banks from becoming too big had helped keep the Australian economy safe in the recent crisis, he said.
''In other words, you have discrete manageable units and you do not have contagion, you limit potential contagion,'' he said in reference to the prospect of too few banks holding souring loans.
Even 16 years ago, when he was prime minister, banks were lobbying to be allowed to merge to expand offshore, Mr Keating said.
"I knew the malarkey was malarkey, and the notion that a group of go-get-'em private businesses (banks) shouldn't have the dead hand of government put upon them in terms of shape of the system was a piece of nonsense articulated by them."
But with securitisation markets shutting down over the past year, choking off a key source of funding for smaller banks and non-bank lenders, Mr Keating said superannuation funds - not just banks - should be able to redeem mortgage-backed bonds with the Reserve Bank to inject liquidity into the market.
''There's no safer investment for a super fund than to put a proportion of its assets in the form of AA-quality Australian mortgage securities,'' he said.
"Fundamentally, securitisation is a sound idea - it became unsound when the issuing bank sold the liability and it was then sliced and diced by other institutions so that the eventual ownership of the mortgage and commitments are so far apart it has to be worthless."
While the Federal Government's $8 billion support package for securitisation markets is almost fully allocated, signs of life appear to be returning to the local market.
Members Equity, a bank backed by industry superannuation funds, was able to sell $1.25 billion worth of mortgage-backed bonds last week - the first major issue of mortgage-backed securities without government support since markets shut down in September last year.
Elsewhere, Mr Keating said it was a mistake that competition considerations were set aside when it came to the Government and bank regulators endorsing Commonwealth Bank's acquisition of Perth-based BankWest.
BankWest, which was being sucked into the problems of its British parent, HBOS, deserved greater support from the Government and the Reserve Bank.
"In a crisis, issues around competition are easily thrown aside as public officials look for the line of least resistance - that is, to fold one institution into another," Mr Keating said.
"It is better more often to support the institution from the outside so that you maintain that competitive structure after the crisis."
Competition regulator Graeme Samuel has vowed to closely scrutinise any future bank mergers, noting today's financial environment is different from what it was late last year.