Four Pillars: Mega-bank merger myth re-emerges but remains unlikely

Any proposed major-bank merger would be looking for a problem to solve, as senior bankers play down the likelihood of any deal.

A merger between two of Australia‘s big four banks is highly unlikely, given the long-standing Four Pillars policy merger ban.

The documented link between Covid-19 and hallucinations is rare but it could explain an infectious variant of a rumour that refuses to die – a merger between two of the big four banks.

In recent weeks, this column has heard serious discussion about two of the three possible merger combinations involving ANZ, Westpac and National Australia Bank, including a suggestion that an ANZ/Westpac proposal is currently under regulatory review.

It’s hard to know exactly what to make of it all.

If the odds of a breach in the Four Pillars policy ban on major-bank mergers are wildly long, as this column believes, the more interesting aspect of the rumour is where it started and why.

Unfortunately, if the past is any guide, those questions will never be satisfactorily answered.

As to the why, the main argument seems to be that Commonwealth Bank has pulled so far ahead of its three rivals that it’s now unassailable in the critical mortgage market and increasingly determined to build a similar position in business banking.

There are two powerful rebuttals of that argument which are as valid now as they have been for decades.

First, since when has a diabolically complex merger involving the potential loss of tens of thousands of jobs – not to mention a mind-bogglingly difficult technology challenge – ever fixed long-term underperformance, or any problem for that matter?

Second, if fortress CBA really is impregnable, how is it that NAB under chief executive Ross McEwan has managed to build market share in its key segment of lending to small and medium-sized businesses?

The Four Pillars policy, originally conceived as six pillars but tapered by Paul Keating to the four major banks in 1990, is not reflected in any legislation.

Former CBA boss David Murray’s 2014 financial system inquiry argued for its retention, saying the policy provided protection for consumers in addition to general competition law.

The free-market Productivity Commission thought differently in 2018.

While falling short of advocating complete abandonment of Four Pillars, the PC said in a report that the Australian Competition & Consumer Commission would be better placed to improve the banking industry’s competitive intensity.

Four Pillars, it said, was an “ad hoc” policy that was now redundant because it duplicated competition and governance protections in other laws.

Some pundits thought Mc­Ewan was pushing the envelope earlier this year when he bid $1.2bn for Citi’s consumer business in Australia.

While Rod Sims was initially animated, as he is by any major-bank merger activity, the ACCC boss eventually flagged through the deal, ruling there was sufficient competition in the credit card market to keep NAB honest.  It scarcely needs to be said that an in-market merger between two of the four major banks would be a completely different proposition.

Despite this, and given this column’s very real interest in a major-bank merger (we’d have to change our name!), there was no alternative but to check in with the industry itself.

Of course, no one wanted to go on the record – any attributed commentary would have been limited to the usual “We don’t comment on market speculation.”

Suffice it to say, though, a senior ANZ banker was sufficiently emboldened to say “it’s certainly not us” when asked about potential merger activity or regulatory review of a possible transaction.

“No one’s working on it at ANZ, but someone’s clearly trying to get this story up and that’s the more interesting question for us,” he said.

Another senior industry figure, who didn’t want his institution named, said he had “absolutely no knowledge” of any merger plans.

Long-time bank analyst Brian Johnson from Jefferies said in a note on Tuesday that a deal was unlikely but CBA would further outperform as a result of industry disruption if the considerable merger barriers were overcome.

The biggest hurdles, he said, would be political opposition this side of the federal election due by next May, and the strong likelihood that the ACCC would stand in the way on competition grounds.

Together, the big four control 77 per cent of the mortgage market.

Currency controversy

The Reserve Bank on Wednesday will release a report on Project Atom, which has been looking into the concept of a wholesale central bank digital currency.

The project, undertaken with CBA, NAB, Perpetual and blockchain technology company ConsenSys, started several years ago, based on a belief that the user-case for a wholesale CBDC was more compelling than the retail version.

The first stream of work in 2019 investigated an interbank payment system using distributed ledger technology (DLT).

It incorporated a tokenised, or digitised, form of CBDC backed by exchange settlement account balances held at the RBA.

More recently, with the four external parties and under the auspices of Project Atom, the project was extended to consider a tokenised financial asset in the form of a tokenised syndicated loan, as well as the implications of settlement on a DLT platform.

The big advantage of a wholesale CBDC is that it would enable commercial banks to cut transaction costs and reduce risk by settling transactions instantly.

Project Atom is a reference to the concept of “atomic settlement”, which allows an asset to be transferred to a buyer at the same time as a payment is made, with no settlement risk.

To provide that level of surety, the banks want to use RBA-backed currency.

NAB director of digital innovation and sustainability Lisa Wade reportedly told a conference last month a wholesale CBDC would enable banks to create “programmable money” and use smart contracts – programs that allow sets of financial instruments or other arrangements to settle or interact on the ethereum blockchain.

Wade said banks wanted to use these features in high-value marketplaces like project finance deals.

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