Competition in Australian Banking

This blog is prompted by an article we read on Steve Keen's Blog (http://www.debtdeflation.com/blogs/) and referenced another blog about Joe Hockey's comments on competition in Banking. Now we don't always agree with Steve Keen and we think Mr Hockey is as much playing populist politics as he is serious.  But the Australian competitive landscape is skewed pretty heavily because of the dominance of the big 4.

But isn't this an apparent function of the size of the Australian economy and remoteness from any decent sized contiguous economy. When you look at other large scalable industries you could argue that Australia, for some reason, is a natural oligopoly economy. Lets look at Groceries and liqour - Coles and Woolies and their subsidiaries, Airlines - Qantas and Virgin Blue even though Sydney-Melbourne is pne of the busiest routes in the aviation industry, Fuel - Caltex, BP and Shell, Mining - Increasingly the big guys BHP and Rio dominate and then Banking with the Big 4

So to this end to single out the Majors seems unfair because we should be having a debate about the strusture of our economy and the tastes of our population and their want for dealing with well known and crucially, big brands. So having allowed the banks to dominate the landscape and given this domination is less concentrated than some other industries we need to set solid ground rules for competition and for pricing rather than simply wax rhetorical.

I believe that ultimately the way to create competition is for the Government to underwrite the credit ratings of the smaller adi's who in quite a few cases carry more capital, less risk, are more conservatively and sustainably funded than a Major but have lower ratings because of supposeded "concentration" of assets in one geographic region or increasingly the fact that they are not seen as strategically important to the economy. This means the marginal cost of funds for a minnow, even BEN or BOQ, is much higher than a Major.

Australia is better off for a strong banking system but the big guys seem to be pushing too far and hard at present. Like the miners who are distorting resource allocation in the economy at the moment and can be thanked for the inflationary pulse and capacity constraints, not to mention the RBA hike this month the banks should either pay rent on their licence  to conduct business and their natural incumbency or the Gopvernment should work on a scheme to wrap qualifying smaller ADI's ratings up to the AA range of the Majors.

Surely this can be done in a way that increases the overall net benefit to the Australian economy and without threatening the Majors viability. The present debate on profits and Housing runs the risk of simply driving up the margins the Majors pay off shore for funding as investors become wary of instability in our system. This will just ensure greater funding pressure on all ADI's and further increases in interst rates over and above RBA increases.

Tht's not to the net benefit of Australians but their detrimant.