Australian Oligopolistic Competition-Free-Samples for Students

Question: Discuss about the Australian Oligopolistic Competition. Answer: Introduction On 30th May 2017, the Financial Review published an article by James Frost titled; Treasurer attacks banks, pushes out levy due date. This article is centered on Treasurer Scott Morrisons speech wherein he criticized the Australian banking sector as an oligopoly whose continued operation has had detrimental financial disadvantages to all Australians. The Treasurer argued that the cheap funding costs, internal modelling benefits and dominant market share have placed the big four banks at an advantageous position thus enabling them squeeze competitors to the wall. The treasurer referred to the House of Representatives Economic Committee whose review of the big four banks concluded that the banking sector is an oligopoly with the major banks having significant pricing power. This concentration of market power in the sector is a systemic risk that continues to hurt the economic interests of the population at large. Mr. Morrison stated that the government was keen on altering the state of affairs and the planned introduction of the bank levy was a move towards improving competition in the banking sector, although concerns remain whether the levy costs will be passed on to customers. However, there were mixed reactions when it came to light that as per the draft legislation, the first payment had been pushed back to March 21st. While this push had been said to affect revenue collections, the Bankers Association Chief Executive Anna Bligh welcomed the move to avoid rushing a hastily designed policy. Further concerns have been raised with respect to the draft legislation such as the likely tax grab effect on all accounts and the fact that the policy is not intended to apply to foreigners. Analysis Whereas neoclassical economists have elaborated what a competitive market entails, politics and business lobbying have made meaningless the idea of competition in Australias banking sector. Though the Australia Bankers Association argues that the banking market is competitive, of all the over 100 banks, societies and credit union operating in Australia, it is only four banks that control over 84 per cent of the mortgage market in Australia (The Australia Institute, 2017). The four banks have drawn benefit from the banking oligopoly that focuses on safe and high-margin mortgages (Janda, 2016). The banks managed to convince the regulatory body to allow them set aside lower sums of money to cover potential losses. This move allowed the banks to provide more mortgages without necessarily having to raise more capital from shareholders. As a result of this immense market dominance, it is argued that the big banks were abusing their market power. This dominance enabled them to enjoy record high profit margins for many financial years but scandals involving rigging of interest rates, poor financial advice and insurance frauds brought into question the exploitation and unaccountability that these banks have enjoyed for so long (Kaye and Westbrook, 2016). As of late 2016, there was a public outcry to alter the status quo to correct the financial systemic errors and it was agreed that reform had to be undertaken to cure the situation. Consequently, a parliamentary inquiry into the major banks was commissioned with the objective of encouraging competition and monitoring the sector closely. The House Economics Committee made proposals thereafter to have reports filed to the government twice yearly and recommended the doing away with constraints in obtaining licenses. To ensure transparency in loan pricing, it was proposed that banks should be required to share with each other customer data. Further recommendations included the setting up of a Banking and Financial Sector Tribunal at the cost of the banks and that banks had to name executives responsible for major breaches accompanied with a detailed explanation of the specifics of the breaches (Shapiro, 2016). In the 2017 budget, the Treasurer seems to have taken huge consideration of the need to introduce reforms to the banking sector. These reforms entail a bank levy in the form of tax targeting the major banks and the introduction of further measures that will promote competition and accountability in the banking system (Hawkins and Sanyal, 2017). Recommendations From the foregoing discussion, it emerges that the major causes of the so-called systemic errors in the banking sector are as a result of lack of competition and transparency in the sector. The 2017 budget reforms are therefore a welcomed move that should be zealously implemented to cure the defects in the banking sector. One recommendation to achieve this outcome is to address the concern that the banks may pass the tax costs to the customers. Although it has been assured that the tax does not apply to bank deposits or mortgages, it is recommendable that the Australian Competition and Consumer Commission should monitor closely to ensure the banks do not mislead customers in a bid to defeat the objectives of the reforms. Further, there is also need to address the unfair advantage that is enjoyed by the major banks due to the generally accepted assumption that in the event of a crisis, these big banks will most certainly receive government support. This perception endears these banks to financiers as opposed to their competitors. To ensure this inequity is removed from the picture, reforms should be adopted to provide for a criteria of ensuring that the small banks also receive monetary support from the government in the event of a crisis. This measure will lead to the realization of a fairly competitive market in terms of the neoclassical economic standards. Conclusion The fact that Australias banking sector is an oligopoly is undisputed. It is commendable that the government is taking measures to address the disquiet that has been evoked by the unpleasant state of the sector. Politics aside, all stakeholders need to work together to ensure the proposed reforms are fully effected and that further measures as recommended above are taken to ensure fair competition and transparency are upheld. This way, confidence and trust will be restored in the financial sector of the economy. The government should also focus on other sectors of the economy that are not competitive enough such as the energy sector Bibliography Degotardi, M. (2012). Competition in Banking. [Pdf] Available at: https://www2.deloitte.com/au/en/pages/economics/articles/competition-in-banking.html [Accessed 24 Aug. 2017]. Frost, J. (2017). Treasurer delays bank levy, pushes competition argument. [Online] Financial Review. Available at: https://www.afr.com/business/banking-and-finance/financial-services/bank-levy-bill-introduced-aims-to-aid-competition-in-oligopoly-market-20170530-gwg7pv [Accessed 24 Aug. 2017]. Hawkins, P. and Sanyal, K. (2017). A levy on major banks and improving accountability for bank executives Parliament of Australia. [Online] Aph.gov.au. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201718/Banks [Accessed 24 Aug. 2017]. Janda, M. (2016). The banks are too big for the nation's good here's why. [Online] ABC News. Available at: https://www.abc.net.au/news/2016-08-31/janda-aus-banks-are-too-big/7789830 [Accessed 24 Aug. 2017]. Kaye, B. and Westbrook, T. (2016). Australian watchdog says bank 'oligopoly' needs more reform. [Online] U.S. Available at: https://www.reuters.com/article/us-australia-banks-idUSKCN12E0F3 [Accessed 24 Aug. 2017]. Morrison, S. (2017). Building an accountable and competitive banking system | The Hon Scott Morrison MP. [Online] Sjm.ministers.treasury.gov.au. Available at: https://sjm.ministers.treasury.gov.au/media-release/044-2017/ [Accessed 24 Aug. 2017]. Shapiro, J. (2016). Bank oligopoly 'adverse' for consumers. [Online] Financial Review. Available at: https://www.afr.com/business/banking-and-finance/financial-services/bank-inquiry-report-targets-big-four-oligopoly-20161124-gswfb5 [Accessed 24 Aug. 2017]. The Australia Institute. (2017). Bank customers pay for oligopoly. [Online] Available at: https://www.tai.org.au/node/614 [Accessed 24 Aug. 2017]