ANZ’s drive to become a “super-regional bank” shows up the need for a fundamental rethink of how we regulate our financial system — one the Rudd Government and its advisers and regulators appear to have no interest in.

While its handling of the collapse in domestic demand caused by the global financial crisis has been nothing short of brilliant, the Government has simultaneously enabled the Big Four banks to use the crisis to consolidate their stranglehold on Australia’s financial system. And ANZ, under British import Mike Smith, is relying on this taxpayer-funded springboard to pursue an offshore expansion that will give no benefits to Australia.

This is where our economic debate should be centred — not on this nonsensical and logic-defying dispute over whether the stimulus should be wound back.

The other week, Christopher Joye wondered on the Business Spectator site whether ANZ was entitled to its “Big Four” status given it appeared to be abandoning the Australian mortgage market in its quest to become an Asian “super regional bank”.

ANZ bit back, with an interesting response from chief spinner Paul Edwards.

Edwards defended the bank’s current low share of mortgage finance (5%) on the basis that “ANZ made a conservative call on the economy and housing market late last year and it’s taking time to adjust our business to the economic conditions we are actually experiencing.”

Smith’s strategy for ANZ is to become, in his own words, a “super-regional bank” in Asia, despite overseas ventures being a graveyard for Australian banks in the last two decades. ANZ defends itself by saying Asian banks have performed well in the GFC, but that overlooks the point that the region has in spades the sort of factors that led to the GFC — poor prudential regulation and over-inflated asset markets — with sovereign risk thrown in for good measure.

If ANZ were doing this off its own bat, that would purely be a matter for its board and shareholders. But ANZ, like the other major banks, is the direct beneficiary of taxpayer support and an apparently deliberate policy of indifference toward the reduction of competition in the sector.

ANZ rejects the idea that it has relied on taxpayer support. “Australian banks have not required taxpayer money to support them. While deposit and wholesale funding guarantees are in place globally, these come at a price for Australian banks,” wrote Edwards.

This is disingenuous. The taxpayer funding guarantees were a critical part of the maintenance of bank stability last year. They were not available anywhere else — they had to come from Australian taxpayers. That the Government wisely charged for the use of its AAA rating doesn’t alter the fact that the banks needed such taxpayer support.

Which brings us to the next point. Why did they receive that support? Because they are systemically important to the functioning of the Australian economy. The big banks are not your run-of-the-mill multi-billion dollar corporations. A sector that needs a Government guarantee during a time of crisis cannot be considered a purely private industry. The banks are at the centre of the Australian economy and both rely on, and profit from, public policy that recognises this.

The profit has come from a deliberate decision to trade-off competition with stability in the approval of the acquisitions of Bankwest and St George by the big banks, which the Government ticked off on and, in the case of Bankwest, the ACCC says it felt it “had no choice” but to approve given the financial crisis. In the eyes of the Government and regulators, competition and stability appear to be mutually exclusive.

The profit has also come from the complete collapse of the non-bank mortgage finance market, leaving the Big Four — or more accurately the Big Two plus NAB and ANZ — with near complete control of the housing finance market. This has partly been brought about by the GFC, but also because the Government has guaranteed wholesale borrowing for banks but not for residential and commercial borrowing. The Canadians have done exactly that and there is a healthy level of competition in Canadian mortgage lending.

The result is that the Commonwealth and Westpac have moved to fill the gap left by the collapse of the non-bank lending sector and prioritised lending to lower-risk residential mortgage lending rather than higher-risk business lending. Australian businesses, particularly small businesses, continue to pay the price.

ANZ, however, is using its taxpayer-supported profitability and the mistaken belief that competition and stability are mutually exclusive to fund an expansion overseas that will yield no benefits to taxpayers beyond whatever additional profit history tells us will not be found in overseas banking ventures.

As a systemically-important, taxpayer-supported entity, ANZ like the other big banks should be subject to an altogether more stringent regulatory framework than that currently established. We need to reconsider banking regulation from first principles.

Tomorrow: better regulation, breathing some life back into non-bank lending and our continuing housing stock problem