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Are the big 4 too big to fail?

Australia’s biggest banks, or the ‘Big Four’, dominate the Australian financial market, from superannuation and business banking to mortgages and retail finance. They are the one-stop-shop for all your financial needs. But should they be? ME Bank Chief Executive, Jamie McPhee, says the upcoming financial industry review needs to address competition and the big banks “too-big-to-fail status.”

Later this year, Treasurer Joe Hockey will announce a sweeping review into the financial system. Although the banks have called on it to be broad-ranging, many are saying it should focus on, at least in part, competition amongst the banks.

ME Bank, which has around $19.6 billion of assets, is owned by some of the country’s biggest industry super funds and could indicate the sector would support increased competition and tougher lending rules amongst the big banks. “The too-big-to-fail status of the major banks has been publicly stated by S&P – because of that status S&P gives them a rating two notches higher, than would otherwise be the case,” Mr McPhee said.

According to Sydney Morning Herald, Mr McPhee’s comments come, “As governments around the world grapple with the “moral hazard” created by very large banks.”

Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), ANZ (ASX: ANZ) and NAB (ASX: NAB) control the lion’s share of both the mortgage and retail markets. However none of the Australian banks are included in the 29 globally significant financial institutions, developed by the Switzerland-based Financial Stability Board.

Outcomes of a review that includes banking sector competition, could result with banks divesting assets or being compelled to adhere to tougher lending rules. Mr McPhee says, “All we’re looking for is a level playing field. We just want competition to be fair.” The big four have a competitive advantage because there is a belief they are underwritten by the government. Therefore, in the event of a financial crisis, the government would step in and support the biggest banks.

Foolish Takeaway

Strict banking regulations enabled Australia to more than survive the GFC, when other countries were unable to keep their heads above water. Australia’s banks, although some of the most expensive in the world, remain the envy of foreign states and tough regulations will only seek to benefit the wider community.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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