Mitigating TBTF: The Australian Four Pillars Policy

Four Pillars Policy

By: Jeff Guadalquiver

The so-called Four Pillars Policy is the mainstay of the Australian government’s intervention within the domestic Australian financial industry. The policy prevents mergers between the four largest Australian banks known collectively as the ‘Big Four’ banks. ‘Big Four’ banks and the rest of the Australian financial markets however, argue the policy is actually counterproductive and detrimental to the financial system as a whole. This research paper discusses the economic arguments by both the supporters and detractors of the Four Pillars Policy, summarises relevant empirical literature regarding Australian financial concentration and discusses the ethical frameworks that guided views on wider policy on consolidations.


Four Pillars Policy is an informal government policy designed to prevent mergers between or acquisitions among the largest four Australian banking institutions known as the ‘Big Four’ banks. The ‘Big Four’ banks are composed of Commonwealth Bank of Australia (CBA), Westpac Group, National Australia Bank (NAB) and Australia and New Zealand Banking Group (ANZ). Based on 2010 data, the ‘Big Four’ banks comprise 56.3% of the Australian financial industry and 76.1% of all banking transactions within Australia are conducted through the ‘Big Four’ banks.[1] Data from 2009-2010 also estimate 82.88% of all lending, 25.9% of investment funds and 57.3% of retail funds under administration are controlled by the ‘Big Four’ banks.[2]

The preponderance of the ‘Big Four Banks’ within the Australian financial industry necessitates special regulations for these banks as exemplified by the Four Pillars Policy. Routine Australian financial consolidations are normally the purview of the Australian Competition and Consumer Commission (ACCC) and Australian Prudential Regulation Authority (APRA), both of which are subordinate agencies of the Australian Treasury. These agencies determine on a case-by-case basis if a particular merger or acquisition is contrary to the public’s interest of healthy competition within the financial industry.[3] Consolidations among ‘Big Four’ banks do not come under the regulatory purview of ACCC and APRA because they merit an automatic blanket ban in accordance with the Four Pillars Policy. The Four Pillars Policy exists solely at the behest of the Australian Treasurer and does not derive from any existing legislation.[4] It is therefore, almost completely discretionary in its application and the Treasurer can effectively repeal the policy by not using her legal executive authority to prevent consolidations between the ‘Big Four’.  

Peter Costello, the Treasurer who instituted the current Four Pillars Policy in 1997, provides the main rationale for the policy.  According to Costello, the main aim of the Four Pillars Policy is to ensure there is robust competition between the four largest commercial-retail banks within the Australian financial market. [5] The policy does not aim to prevent or discourage mergers and acquisitions within the banking industry as a whole but merely to prevent the Big 4 banks from merging with each other. In fact, Costello sees no underlying problem with Big 4 banks acquiring other financial institutions as long as they steer clear of actually combining amongst themselves.[6] Succeeding Treasurers have mainteained Costello’s fairly laissez-faire view of what the Four Pillars Policy entails with regards to financial concentration. This is clear from the continued expansion of the Big 4 Banks through consolidations with smaller financial institutions. In 2008 for example, CBA acquired BankWest, then the sixth largest Australian bank, while WestPac negotiated a merger with the then fifth largest bank, St. George.[7] The consolidations were allowed to proceed despite a sharp increase in banking concentration as a result of these agreements.

Four Pillars Policy – Public Policymaking Perspective

The Four Pillars Policy mostly enjoys bipartisan support from the Australian political mainstream of centre-left Labor and centre-right Liberal parties since its establishment. It was under Labor Treasurer, Paul Keating that the precursor to the Four Pillars Policy, the so-called ‘Six Pillars Policy’, was enacted during the late 1980s. The ‘Six Pillars Policy’ was designed to prevent consolidations among the ‘Big Four’ Banks and the two largest Australian insurance companies, National Mutual and AMP.[8] Applying the ‘Six Pillars Policy’, Keating blocked a proposed merger between ANZ and National Mutual. The blocking of the ANZ-National Mutual merger was a notable departure from the prevailing government orthodoxy at that time, which not only ignored the consolidation between financial industry giants but actively encouraged them.[9]

The Liberals’ more pro-market inclinations compared to that of Labor presaged a return to the regulatory era before Keating’s seeming break with tradition. Surprisingly however, succeeding Liberal administrations maintained the core of Keating’s ‘Six Pillars Policy’, albeit with a more relaxed attitude in regards to the largest insurers. It was under the Liberal Treasurer, Peter Costello, the Four Pillars Policy took its present form. Costello loosened the “Six Pillars Policy” and instituted the current “Four Pillars Policy” after the publication of the Wallis Report in 1997. Although the Wallis Report recommended the wholesale abolishment of consolidation controls between these financial institutions, Costello maintained the policy of preventing the ‘Big Four’ banks from consolidating and only loosened the controls over that of life insurance companies. [10]

Policymakers have challenged the Four Pillars Policy since its inception to the present day despite the policy’s dominance within the Treasury department. The aforementioned 1997 Wallis Report advocated the complete repeal of the blanket ban on consolidations among ‘’Big Four’ and have these mergers be subjected to normal ACCC review.[11]

The Four Pillars Policy is also threatened by Australian participation in the negotiations being held for the ratification of the Trade in Services Agreement (TiSA). TiSA is an international initiative by Australia, the European Union and the United States that aims at further trade liberalisation for the services sector among 23 states.[12] A secret draft text of the Financial Services Annex of TiSA targets greater deregulation of foreign banking investment that can potentially undermine the stability of the Four Pillars Policy.[13] A particular dilemma is the possibility of foreign acquisition of one of the ‘Big Four’ banks. The Treasurer will be forced to prevent the acquisition from abroad due to domestic pressure, which contravenes TiSA. Once a foreign takeover attempt occurs, the Treasurer must repeal the Four Pillars Policy and allow consolidations between the ‘Big Four’ to stave off foreign encroachments.[14]

Despite potential challenges to the Four Pillars Policy, there is no sign it is going to be discarded any time soon. In fact, government officials have doubled down on their support for the long-standing policy. The Department of Foreign Affairs and Trade emphasizes TiSA will not affect the Australian government’s prudential management with regards to the maintenance of the separation between the ‘Big Four’ banks.[15] The Shadow Treasurer from Labor opposition, Chris Bowen, criticised the potential revocation of the policy by TiSA as ‘irresponsible’.[16] In response to attacks on TiSA and its potential effects on the Four Pillars Policy, then Liberal Treasurer Joe Hockey stated there would be no change in the immediate future. Apart from expressions of support from the political establishment, some political figures have even argued a further strengthening of the Four Pillars Policy. Former Treasurer Wayne Swan argues for the establishment of what is in effect a ‘Five Pillars Policy’. According to Swan, the merger between the Insurance giants, AMP and AXA, serves as another potential financial buffer similar to that of the extant Big Four Pillars.[17] 

Supporters of the “Four Pillars Policy” within the regulatory establishment believe the policy contributed greatly to the strength of the Australian financial sector. Former Reserve Bank[18] governor, Ian McFarlane, argues the policy allowed Australia to emerge virtually unscathed during the 2008 Global Financial Crisis by stabilising competition between the ‘Big Four’ banks.[19] The IMF corroborates McFarlane’s position by stating the policy allows for competitive stability in financial markets and lessens systemic risks inherent within the ‘Big Four’ financial concentration.[20] Another issue in support of maintenance of the policy is prudential concern. David Murray, head of a financial inquiry under the Abbott government, opposed any relaxation of the policy due to concerns it will lead to further banking concentration at the top. He believes that once the current ‘Big Four’ consolidates into a ‘Big Two’, the result is effect ‘too big to fail’ in a regulatory sense.[21]

Four Pillars Policy – The Big Four’s Perspective

The ‘Big Four’ banks, with the exception of CBA, are and have been opposed to the Four Pillars Policy since its introduction. NAB, like the majority of the ‘Big Four’, has a negative view of the Four Pillars Policy.  Former NAB head of Government Relations, Steven Munchenberg, thinks the removal of the policy greatly benefits the Australian financial industry. He believes further consolidation resulting in larger banks allows for greater and cheaper access to overseas credit. NAB takes the position that while the Four Pillars Policy is counterproductive, actively calling for its repeal is completely unnecessary.[22] The negative view that NAB has of the ‘Big Four Policy’ is not surprising due to its own crisis during the early 2000s. In that period, NAB suffered severe business losses that culminated in a $4 billion loss from its US mortgage subsidiary. ‘Four Pillars’ was blamed by the industry for preventing consolidations that would have made NAB and the rest of the ‘Big Four’ more competitive vis-à-vis other global banking institutions.[23]

International pressure experienced by NAB is the catalyst, the former ANZ chief John McFarlane believes, will eventually end the Four Pillars Policy. He argues the policy as a safety net is redundant and must be abandoned to make the Australian financial industry more internationally competitive. His belief the Australian government will eventually repudiate the policy in the long-term after foreign firms attempt takeovers of the ‘Big Four’, curiously mirrors the debate with regards to TiSA and its possible effects on the ‘Four Pillars’.[24] Succeeding ANZ chief, Mike Smith, supports his predecessor’s views by stating the ‘Big Four Policy’ is unlikely to be changed in the short-term despite being undesirable for ANZ.[25]

Another ‘Big Four’ critic of the Four Pillars Policy is former WestPac head, David Morgan. Compared to ANZ and NAB’s gradualist views of how the ‘Four Pillars’ will eventually be abandoned, Morgan argues for its active repeal. According to Morgan, the policy is unfair to the banking industry because other sectors of the economy are not subject to the same restrictions. He urges a more radical relaxation of financial controls by abolishing the ‘Four Pillar’ system completely.[26] He views the policy as outdated and not suited to the more globalised, modern Australian financial system.  Echoing criticisms of the policy during early 2000s, Morgan sees the policy hampering the ‘Big Four’ in competing against foreign institutions because the latter can form large banks that dwarf each of the ‘Big Four’ banks individually.[27] Lastly, Morgan corroborates McFarlane’s view that the policy is powerless in preventing foreign acquisition of any of the ‘Big Four’. In fact, he argues the policy makes it easier for foreign firms to acquire a ‘Big Four’ bank, as there will be no competition from domestic acquirers.[28]

CBA is the lone supporter of the ‘Big Four Policy’ among the so-called ‘Big Four Banks’. The bank believes the policy has allowed for stability and consequently, growth of the Australian financial system. According to CBA, the reforms implemented as a response to the Wallis Inquiry, which includes the Four Pillars Policy, has contributed to the strength of the Australian economy. CBA credits these reforms in contributing to Australia’s high investment rates and continued high profitability of the ‘Big Four’ banks.[29] CBA’s view is in contrast to the other ‘Big Four’ banks, which view the policy as a hindrance to the growth and modernisation of the Australian financial industry.

Bank Concentration, Efficiency and Competition

The most relevant issue with regards to the Four Pillars Policy is bank concentration and its effects on the financial system. From the government point of view, the main concern is to what extent increasing bank concentration affects its prudential management of competition within the financial sector. On the other hand, the financial industry is concerned with bank concentration to the extent it allows for greater efficiency. Government policymaking with regards to the Four Pillars Policy must therefore balance its own prudential and regulatory interests with that of the self-interested, profit maximising concerns of financial firms.  

From pure profit-making motives, the modern financial system has been moving into greater consolidations. According to Ian Harper, the financial industry began to increasingly rely more on trading of securities, which requires less capital, instead of balance-sheet intermediation. As a result, banks have three choices to maintain their profitability. First is the release of surplus capital from firms acquired by their competitors. Second would be to raise the rate of return through mergers. Third would be to adopt new profit-maximising technology that allows repayment of surplus capital to shareholders.[30] Since adoption of newer technology is not feasible given the much more conservative structure of the financial industry, it stands to reason most banks would try to maintain their profitability through consolidations.

In Harper’s model of the financial system, mergers have three beneficial outcomes making them desirable for banks. First, mergers raise revenue for the consolidated entity. It will have the ability to cross-sell its financial products to customer bases of each individual firm. In addition, consolidated entities have an advantage in underwriting corporate securities because they have the size to win larger tenders. Second, mergers lower costs because the consolidated entity can utilise economies of scale to rationalise duplicate bank branches. Lastly, mergers lower risks by raising risk-adjusted return to capital and reduce ruinous risk. Risk-adjusted return to capital is increased due to the fact the consolidated entity can diversify risks among a wide variety of assets compared to its individual components. Ruinous risk is markedly reduced because larger, consolidated entities can absorb greater losses than their individual components.[31]

Empirical research conducted by Su Wu of 17 Australian bank consolidations from 1982 to 2000 shows Harper’s assertion that consolidations are more efficient than their individual component entities is not necessarily true. There are no strong economies of scale present in the consolidated banks. In fact, the main source of inefficiency according to the study is scale inefficiency by the acquiring banks, which carry over to the consolidated entity once the process of consolidation is completed. Wu concludes if the ‘Big Four’ are allowed to merge, magnified diseconomies of scale resulting from these consolidations negatively impact the overall efficiency of the Australian banking system.[32]

A literature review conducted by Kevin Davis reveals increasing banking concentration has no discernible negative effect on competition within the financial markets. Davis argues that evidence shows almost counterintuitive trends between competition and banking concentration. Australian banking concentration has been increasing just as the financial markets have become more competitive instead of less competitive due to fewer players. Another surprising finding is banking concentration has negligible effect on the stability of the financial system. The only safeguard needed with consolidations is for regulatory agencies to ensure there is no implicit or explicit guarantee for the consolidated entity. This ensures the consolidated entity does not take on more risk due to the presumed government safety net.[33] In effect, there is no difference in systemic risks between non-‘Big Four’ and ‘Big Four’ consolidations. Both consolidations can be reviewed on a case-by-case basis by the ACCC and APRA without causing undue harm to the wider financial industry.

Ethics in Consolidations

According to Jonathan Riley, representative democratic governments are essentially an indirect implementation of utilitarianism in practice. The elected representatives serve as proxies for the general public. Therefore, policies that representatives implement correspond to actions that maximise the welfare of the general public.[34] The regulation of financial sector consolidations is therefore, an outgrowth of the utilitarian impulse present within the representative democracies such as Australia. These utilitarian principles were embodied in the regulatory agencies in charge of regulation of financial consolidations, ACCC and APRA. ACCC’s stated objective is to:

 Our role is to protect, strengthen and supplement the way competition works in Australian markets and industries to improve the efficiency of the economy and to increase the welfare of Australians. [emphasis added][35]

While APRA’s stated role from its founding legislation:

“APRA is to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, is to promote financial system stability in Australia. [emphasis added]”[36]

The wording of the functions, roles and responsibilities delegated to these agencies emphasises the utilitarian viewpoint that underpins the government’s consolidation policy. The government will only allow increased financial concentration to the extent that it corresponds to the greatest welfare for the general public, of which the financial industry is only a part.  

The financial industry is guided by a different ethical philosophy to that of a representative government.  A firm’s main responsibility is to ensure its fiduciary obligations to shareholders is fulfilled. These obligations to shareholders trump other relevant parties such as creditors and employees.[37] These fiduciary obligations derive from the shareholders’ ownership of the firm and the agency relationship it has with the firm’s management. [38] At the same time, the firms must ensure that any actions taken with regards to furthering shareholders’ interests must comply with standards set by government regulatory agencies. The firms work under a deontological framework wherein adherence to the fiduciary and regulatory obligations is an end to itself and do not consider consequences resulting from the actions as is the case with utilitarianism. It is no surprise modern financial industry tends to favour heavy concentration since the consolidation process is in pursuance of continued profitability for the shareholders of each individual firm.  

Government and the financial industry responses with regard to the Four Pillars Policy are similarly guided by these ethical frameworks. Government policy makers see the implementation of the policy in a consequentialist, utilitarian sense: the effect of the policy, narrowly within the wider financial sector and more broadly over the Australian economy. The utilitarian perspective of policymakers takes a more macro-level look with regards to the policy and sees potential for systematic risk without the policy. On the other hand financial firms operate more strictly on a deontological basis through their commercial and legal obligations to maximise profits for shareholders and conform to regulatory standards respectively. Therefore, firms such as the ‘Big Four’ see the policy as inhibiting their capability to maximise their profits by prohibiting potentially profitable consolidations.     

Four Pillars Policy Carries On

The ‘Big Four Policy’ as a policy regime was put in place primarily to protect competition with the Australian financial sector with a blanket ban on consolidations among the ‘Big Four’ banks. It is an informal policy that derives mostly from the Australian Treasurer’s executive order to stop consolidations between any firms as a matter of public interest. The policy has enjoyed widespread support among policymakers as a contributing factor to the stability of the financial system while it has been criticised by a majority of the ’Bank Four’ as contributing to the handicap of the Australian financial system in trying to compete with global consolidated financial firms. Opponents of the policy believe repeal of the policy resulting in further concentration at the top of the Australian banking system will allow Australian banks to be more competitive abroad. However, both the underlying assumptions of supporters and opponents of the policy have been proven to be not necessarily correct. Empirical research finds that consolidations can potentially be more inefficient than their underlying pre-merger components. Lastly, there has been no clear relationship between increased banking concentration, which ‘Four Pillars’ seeks to partially address, and decreased competition and greater systemic financial instability. An ethical analysis shows that utilitarian and deontological perspectives inform the views of the government and the financial industry on the Four Pillars Policy and financial concentration respectively.



[1] Carolyn Evans, Deborah Healey, Marina Nehme, Rob Nicholls and Charlotte Penel, “Competition in Financial Services,” Centre for International Finance and Regulation (2015): 25

[2] Stephen Tunley, “The big banks have large fingers in your financial wallet – how big are they and is it good for you?,” accessed February 2, 2016,

[3] Ian Harper, “Mergers in Financial Services: Why the Rush?,” Policy Forum: Merger Policy in Australia, The Australian Economic Review, Vol. 33, No. 1: 67

[4] Rodney Maddock, “Four pillars or four pillows? Banking’s comfy collective,” The Conversation, February 18, 2014, accessed February 2, 2016,

[5] Hon. Peter Costello, Launch of Simplified Accounting Methods for Small Business, Transcript 2000/24, Australian Treasury Department (2000), accessed February 2, 2016,

[6] Ibid.

[7] Lachlan Colquhoun, “Banking – Market opinion swells against Canberra’s four pillars policy,” Global Capital, November 1, 2008, accessed February 2, 2016,; Adrian Barclay, “Australian Bank Mergers & Acquisitions: Who owns my bank?”, accessed February 2, 2016,

[8] Phil Hanratty, “The Wallis Report on the Australian Financial System: Summary and Critique,” Economics, Commerce and Industrial Relations Group – Australian Parliament (1997), Research Paper 16, 

[9] Richard Maddock, “Four pillars or four pillows? Banking’s comfy collective,” The Conversation

[10] Ibid.

[11] Phil Hanratty, “The Wallis Report on the Australian Financial System: Summary and Critique,” Economics, Commerce and Industrial Relations Group – Australian Parliament

[13] Philip Dorling, “Secret trade negotiations: is this the end of the big four?,” Sydney Morning Herald, June 20, 2014, accessed February 5, 2016,

[14] Rodney Maddock, “Why we needn’t fear the end of the Four Pillars policy,” The Conversation, June 20, 2014, accessed February 5, 2016,

[16] Colin Brinsden, “Leave Four Pillars policy alone: Bowen,” Sydney Morning Herald, June 20, 2014, accessed February 5, 2016,

[17] “Treasurer Wayne Swan flags change to four-pillars policy,” November 21, 2010, accessed February 5, 2016,

[18] Note: The Australian Central Bank

[19] John Durie and Richard Gluyas, “Four Pillars policy our shield against crisis,” The Australian, March 3, 2009, accessed February 5, 2016,

[20] Addressing Systemic Risk Through Higher Los Absorbency, Financial Sector Assessment Program Update – Australia, International Monetary Fund, 2012: 4-19

[21] Annabel Hepworth, “Inquiry chair David Murray backs four pillars policy,” The Australian, February 15, 2014, accessed February 5, 2016,

[22] Lachlan Colquhoun, “Banking – Market opinion swells against Canberra’s four pillars policy,” Global Capital

[23] Ross Buckley, “NAB crisis shows the four pillars policy has failed,” The Age, February 9, 2004, accessed February 10, 2016,

[24] Ali Moore, “Ali Moore talks to ANZ CEO John McFarlane”, Transcript, Australian Broadcasting Corporation,

[25] Lachlan Colquhoun, “Banking – Market opinion swells against Canberra’s four pillars policy,” Global Capital

[26] Christian Catalano and Tim Colebatch, “Costello stands by the ‘four pillars’ in banking,” Sydney Morning Herald, November 15, 2004, accessed February 10, 2016,

[27] David Morgan, “Facing the Future – Opportunity beckons,” Australian—Israel Chamber of Commerce Luncheon (2005): 4, accessed at

[28] David Morgan, “Things that need to be done – Securing a Better Future,” Address to Australian—Israel Chamber of Commerce (2007): 3, accessed at

[29] Wellbeing, Resilience and Prosperity for Australia – Financial System Inquiry,’ Commonwealth Bank of Australia (2014): 10 -11, accessed at

[30] Ian Harper, “Mergers in Financial Services: Why the Rush?,” Policy Forum: Merger Policy in Australia, The Australian Economic Review, Vol. 33, No. 1: 68 – 70

[31] Ibid.

[32] Su Wu, ”Bank Mergers and Acquisitions – An Evaluation of the ‘Four Pillars’ Policy in Australia,” Australian Competition and Consumer Commission, Australian Economic Papers (2008):141 – 155

[33] Kevin Davis and Ian Harper, “Banking Concentration, Financial Stability and Public Policy,” Structure and Resilience of the Financial System Conference, Reserve Bank of Australia (2007): 255 -285

[34] Jonathan Riley, “Utilitarian Ethics and Democratic Government,” Ethics (1990), Vol. 100, No.2: 342

[35] Australian Competition & Consumer Competition, “About the ACCC”, Accessed February 26, 2016,

[36] Australian Parliament, House of Representatives, Australian Prudential Regulation Authority Act 1998, Accessed at

[37] Stephen Bainbridge, “A Duty to Shareholder Value,” New York Times, April 16, 2015, accessed March 2, 2016, 

[38] John R. Boatright,”Fiduciary Duties and the Shareholder-Management Relation: Or, What’s so Special about Shareholders?,” Business Ethics Quarterly (1994), Vol. 4, No. 4: 393 – 407