It's time we broke up the retail arms of Australia's Big Four banks

By Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

The idea of separating out the arms of the “Big Four” banks like insurance and superannuation from their core banking business is gaining traction in Australia. It featured in the Greens' banking and finance election policy. However this is not a new idea; Australia is just catching up to banking reforms already made by the UK.

The proposals by the Greens are, in international terms, actually quite tame. The Greens talk about “looking at breaking up the banks,” rather than actually breaking them up. They also suggest applying a “tax deductible levy of 0.20% on the asset base of institutions worth greater than $100 billion” on the “too big to fail” Big Four.

Other jurisdictions have gone much further than the Green’s proposals. For example, following the recommendations of the Vickers’ Inquiry into the UK banking system, banks with assets over £25 billion, will be required from 2017 to split off their retail banking activities into separately managed entities that can be floated off, if the holding company goes belly up. Similar rules are also to be enacted throughout the European Union.

Far from local banks being well-regulated, the latest research on managing systemic risk by the Bank of England shows that Australian banks are simultaneously extreme outliers, in regards to size relative to GDP, yet among the lowest of their peers as regards capital requirements. This is extremely risky, especially given the banks’ exposure to the Australian housing market.

The Australian taxpayer is providing a guarantee for such risky behaviour which the Reserve Bank estimates to be worth some $3.5 billion per year to the big four banks.

One of the Green’s proposed considerations is to investigate:

“The nature of vertically integrated business models, including: i. the integration of everyday banking, financial planning, wealth management and insurance within a single entity; ii. whether the incentives provided encourage illegal or unethical conduct; and iii. whether the incentives provided are aligned with the duty of care to customers.”