Don’t bother pleading with banks to be nice. They’re too busy synchronised swimming

The big four banks are again facing criticism for putting their own interests ahead of their customers’. This time the concern is that they have responded to recent Reserve Bank interest rate increases by raising the rates they charge borrowers more than the rates they offer savers, or those who lend their money to the banks. By widening the gap between the interest rates they earn versus the rates they pay, they increase their profits.

The reaction from some politicians and media commentators has been clear: in essence, banks need to do more to help families, many of whom face significant financial pressure. Why not, for example, be slower to pass on rate rises to mortgage holders, just as the banks have been for savers.

Homeowners are being skewered by rising interest rates.Credit: Andrew Dyson

The big four banks are also criticised for seemingly raising rates faster than they lower them in response to Reserve Bank changes, or for charging existing customers more than they do new borrowers they are trying to attract (the so-called “loyalty tax”).

What are we to make of all this? Politicians will get nowhere by urging the big four banks to act against their own self-interest. We need to be continually reminded that companies are in business to maximise their profits, not the interests of their customers. They will, of course, look to their customers’ interests when it suits their profit objective, which hopefully is often the case. But company management and boards get applause, and financial rewards, when their profits are higher, not otherwise.

We must also remember that those who supervise our economy say they want the big four banks to be “unquestionably strong”, as they see this as central to the stability of the financial system. While having failing banks is clearly a problem, it is a question of balance. Seeking “unquestionably strong” banks must mean, to some extent, favouring their profits over their customers’ interests. It also favours stable players and business models over innovation and change.

It should be the objective of public policy to align the interests of companies seeking profit and the interests of their customers (and, hence, Australians generally). In a market economy, the way to do this is to ensure companies face strong competition. Companies will then, as Adam Smith observed with his notion of the “invisible hand”, work in the interests of their customers and the overall economy.

When there is inadequate competition, when companies have market power to set prices – free of serious contest – they will naturally prioritise their profits over the interests of others. Strong competition is the natural “regulator” of a market economy and is essential to its proper functioning.

As studies by the Australian Competition and Consumer Commission have shown, the big four banks have considerable market power. Together, for instance, they control about 80 per cent of the housing mortgage market. The biggest problem is that, in many ways, they act as a mature oligopoly. That is, one of the big four will not strongly compete by offering customers better prices as they know the others will do the same – and they will all lose. In the past, I have described their behaviour as akin to “synchronised swimming”.

If we are serious about getting the big four to act more in their customers’ interests, we should do all we can to promote competition. The critical step is to strengthen Australia’s merger laws. Currently, to prevent anti-competitive mergers, the ACCC must provide evidence to a court that a merger will cause adverse consumer outcomes before that merger has occurred. The courts rarely accept that gaining, extending or entrenching market power will, in itself, lead to anti-competitive outcomes; commercial logic is rarely accepted.

Our merger laws need to change; they need to see the ACCC as the first-instance decision-maker, and there must be more focus on the impact of a merger on market power, not on proving there will be specific results from a merger that is yet to occur.

There are, and will be, mergers before the ACCC that involve one of the big four taking over a smaller competitor. It is better if the big four banks compete for customers rather than acquire them, and if there remain many smaller players competing to raise their market share. Stopping further big four consolidation is crucial to promoting competition and so the interests of bank customers.

Another step is to have regulatory arrangements that assist competitors to the big four, not constrain them. The size of the big four banks allows them to more easily meet regulatory hurdles, such as prudential requirements. Existing regulatory arrangements favour the big four but they need a greater focus on promoting competition and innovation.

The moral here is that there is little point in politicians and the media pleading with the big four to act against their self-interest. This will not work in banking or in other sectors. Actions, not words, are needed.

The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. Sign up here.