Australia has one of the world’s most concentrated banking sectors, with its four biggest banks – Commonwealth Bank, National Australia Bank, Westpac and ANZ – holding more about three-quarters of the market,

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It will become even more concentrated if ANZ – the “minnow” of the big four – completes its plan to buy the banking division of Queensland-based Suncorp for A$4.9 billion.

Suncorp, which also has a large insurance division, is the second largest of Australia’s four major regional banks. It is a significant brand in Queensland, and known to the rest of Australia through the name of Brisbane’s rugby stadium.

This will be the largest consolidation in Australian banking since 2008, when Commonwealth Bank took over Perth-based Bankwest and Westpac acquired Sydney-based St George Bank. It will push ANZ from fourth to third place by loan value.

First though, it needs two regulatory approvals – from the Australian Competition and Consumer Commission, which can block any merger that “substantially lessens” competition in any market; and the federal treasurer, who has specific powers over the financial sector.

Approval is by no means guaranteed.

ANZ’s chief executive Shayne Elliott has argued the deal will “improve competition”. But that’s probably true only for ANZ.

Every smaller competitor, and consumers, have good grounds to argue the competition watchdog, or federal treasurer Jim Chalmers, should be vetoing the deal.

This isn’t 2008

When the competition watchdog and then federal treasurer Wayne Swan approved the acquisitions of Bankwest and St George in 2008, it was feared the alternative was these banks collapsing in the wake of the global financial crisis.

Bankwest’s owner, the Bank of Scotland, was in dire financial straits (and in 2009 would itself be taken over, by Lloyds Bank).

St George was in trouble, having had to raise its interest rates more than its rivals because it had borrowed so much money to expand its loans business.

ANZ’s competition argument

Suncorp is under no such existential threat. The ANZ chief executive’s argument about why the merger is good for competition has instead been based overwhelmingly on what it means to ANZ:

As the smallest of the major banks, we believe a stronger ANZ will be able to compete more effectively in Queensland offering better outcomes for customers.

He told the Australian Financial Review: “Just as Suncorp probably feels dwarfed by ANZ, we feel dwarfed by CBA.”

Absorbing Suncorp’s $45 billion of deposits and $58 billion in commercial and home loans to its books will push up ANZ’s share of the home-lending market to about 15.4%, compared with Commonwealth Bank’s 25.9%, Westpac’s 21.5% and NAB’s 14.9%.

But for everyone else, including consumers, other banks and regulators, the deal will likely hinder competition.

Concentration and competition

High market concentration does not necessarily mean competition is weak or that community outcomes will be poor, as the Productivity Commission concluded following its 2018 inquiry into the state of competition in Australian financial services.

Rather, it is the way market participants gain, maintain and use their market power that may lead to poor consumer outcomes.

However, the Productivity Commission also concluded Australia’s major banks had charged prices above competitive levels, offered inferior quality products, and had acted to inhibit the expansion of smaller competitors.

All are indicators of the use of market power to the detriment of consumers.

Bucketloads more evidence has come from the banking royal commission, which found evidence that all four big banks (and many other financial services companies) had committed illegal or unethical acts to maximise profits at their customers’ expense.

Read more: What are we teaching in business schools? The royal commission's challenge to amoral theory

Tackling the ‘cosy olipoly’

Following the publication of the royal commission’s final report in February 2019, the Australian Competition and Consumer Commission’s head, Rod Sims, said

A cosy banking oligopoly is surely at the heart of recent problems, so we must and will find ways to get more effective competition in banking.

This mission is a work in progress. Some hopeful experiments, such as the “neobanks” (pure digital banks) are failing. Australia’s first neobank, Volt, which was granted its license to operate as a authorised deposit-taking institution in 2019, collapsed last month. The second neobank, Xinja, quit the banking business back December 2020.

Read more: It's unanimous: Economists' poll says we can fix the banks. But that doesn't mean we will

Given this, it’s hard to argue that further concentration is good for competition.

For the competition watchdog to block the deal, however, it must be convinced of a “substantial” lessening of competition. That means ANZ gaining market power to “significantly and sustainably” increase its prices or profit margins.

By my reading this deal will certainly lessen competition – but it’s uncertain if it will do so according to the “substantial” test.

Either way, this will prove a major test for the new chair of the Competition and Consumer Commission Gina Cass-Gottlieb and new treasurer Jim Chalmers.