Wallis Report Is A Damp Squib
Sydney Morning Herald
Sunday April 13, 1997
The Wallis report on reform of the financial system is a fizzer. It's not the world-changing document Peter Costello and the committee led us to expect and sections of the media have billed it as.
In terms of its potential impact on bank customers and the wider economy, it bears no comparison with the Campbell report. The plain fact is that you can deregulate the financial system only once. When you've done so, all that remains is tidying up loose ends. And that's all the report's about: tidying up. It contains just one truly radical proposal - to remove the prudential supervision of the banks from the Reserve Bank and explicitly renounce the implicit government guarantee of bank deposits - and that's both economically muddled and politically untenable. The report took 770 pages to examine the financial system and find that there isn't a lot wrong with it - or, at least, not a lot that can be fixed by changed regulation. Its central thesis is that the factors which will transform the financial landscape in coming years are not its reforms, but technological change and innovation initiated by the private sector - a distinction that was lost on most of the media. Let's look at its key recommendations and see how much they're likely to add up to in practice. The first topic is mergers. Here, of course, we have the advantage of knowing not just what the report proposed, but what the Government decided to do. From the very time the report was commissioned, we were left in little doubt that it would lead to the abandonment of the Six Pillars policy. When the financial markets were salivating over this prospect, what they had in mind was the removal of the ban on mergers between the big four banks. It didn't happen. The Six Pillars policy was merely replaced with a Four Pillars policy. So all that's new is the possibility (but not necessarily the likelihood) of a merger between a big bank and a big life office. This would do little to reduce competition, little to worry the public and little to change the shape of the world. (The precedent for bank/life office mergers has been set already by Colonial Mutual's takeover of the State Bank of NSW.) And don't imagine that Mr Costello's addition of the words "at this time" to his refusal to permit big-bank mergers is a sign that he will permit them in a year or two's time. It's no more than a face-saver. He went on to say that this decision would be reviewed only when the Government was satisfied there'd been a significant increase in competition for lending to small business. Regrettably, that's not going to happen any time soon - and it's a hint at the obvious: the most binding constraint he faces in this area is that the public wouldn't wear it. Next is Mr Costello's decision to remove the blanket prohibition on a foreign takeover of any of the Big Four. The first point is that it remains to be seen whether any foreign bank is seriously interested in such a takeover. The second is that it remains to be seen whether, when it came to the crunch, the Government would have the political courage to permit it. The most significant aspect of Mr Costello's announcement is that he's retained the Treasurer's personal right of veto over all bank or insurance company takeovers. That's a revolution? More fundamentally, a foreign takeover of one of the Big Four is only a big deal politically. From an economic perspective, it might increase competitive pressure a bit, but not a lot. After you've dealt with mergers, what's left in the report's recommendations? The media made much of Stan Wallis's remark that further rationalisation of bank branches was "inevitable". But that's just the point: it's inevitable even if there'd been no report. It's being driven by technological change. Similarly, the media made much of the proposal that the banks should be free to set fees and charges as they choose. But that's not a lot different from what we've got at the moment. It's not so much the Government that's been constraining them, as the hostility of their customers. No, what's left in the report's recommendations is its proposals for rationalising the various authorities responsible for regulating different bits of the financial sector. Here, the proposals affecting safety and stability are a big deal (because they're so wrong-headed). Apart from that, these are issues of great interest only to those directly affected: the financial institutions themselves and the bureaucrats who'd be winners or losers. The impact on customers and the wider economy would be small. * For a (doubtless) more authoritative view of the report's implications, it will be discussed at a joint Economic Society/Australian Business Economists' dinner tomorrow night at the Regent Hotel. An inquiry member, Professor Jeff Carmichael, and Professors Allan Fels and Tom Valentine will speak. Cost: $85 (members, $75). Phone Freda Treloar on 9969 1470.
© 1997 Sydney Morning Herald