ANZ Bank has hit out at the Productivity Commission's draft findings on banking competition in Australia, arguing that local banks do not hold substantial market power and are unable to pass on costs without losing customers.A key finding of the Productivity Commission's draft report was the four major banks enjoy sufficient market power that allows them to pass on costs and set prices without sacrificing market share.ANZ argues in its submission that the PC inquiry's draft report does not stump up enough evidence to support this finding."While this finding is consistent with popular belief, it is not well supported, including by the evidence presented in the draft report," the bank maintains."If the draft report is suggesting that banks hold substantial market power collectively, we believe the evidence instead indicates that banks compete against one other."ANZ warns that an unsupported finding of "substantial market power" could risk directing policy at measures that do not help consumers or the financial system."As large as Australia's banks are, none are dominant enough individually to sustain uncompetitive pricing and merit the conclusion that they hold substantial market power," ANZ says."With around 15 per cent market share, this is particularly true of ANZ … this market share is below thresholds used by the ACCC and offshore regulators in assessing dominance."The bank - somewhat controversially - invokes the academic work of a young German economist, Dr Niklas Horstmann, to support its claim that tacit collusion "almost never" occurs in product markets with four or more sellers.ANZ attempts to undermine the methodology and assumptions used by the inquiry to make its draft findings by casting doubt on the panel's understanding of consumer behaviour.The bank argues that the findings of the inquiry's draft report rely on the assumption that Australian bank customers are irrational."We would encourage the commission to view consumers as heterogeneous, with differing preferences and capabilities to engage with financial matters," ANZ told the inquiry."Policy which is built on an assumption of the universally irrational consumer is likely to be as unhelpful as policy founded on the universally rational one."ANZ also advances several arguments against the commission's proposal to ban interchange fees on card transactions."The RBA recently considered interchange fees and set rate ceilings that it believes are appropriate for the market," the bank observes."The commission has not analysed whether the benefits that merchants obtain from card schemes exceeds the costs."However, a glaring weakness in ANZ's advice to the commission on interchange fees was that it did not indicate how the inquiry might independently weigh the benefits and costs of card schemes to merchants.Put simply, the bank skirted the perennially sensitive issue of whether global card schemes such as Mastercard and Visa should be required to disclose the scheme fees they collect from merchants via the banks.While ANZ's submission is mostly focused on arguing against some of the commission's most important draft findings and recommendations, the bank highlighted its support for increasing consumer protection in the mortgage broking sector."We also agree in principle with enhancing consumer protections