COBA’s opening statement focussed on the impact of the implicit guarantee which the large banks enjoy, which they says is distorting the banking market by providing the biggest players with an unfair funding cost advantage. They welcome the major bank levy as a modest step towards reducing this funding cost advantage.
COBA is the industry association for Australia’s customer owned banking institutions – mutual banks, credit unions and building societies.
We have 4 million customers, around 80 institutions across Australia, $106 billion in assets and roughly 10 per cent of the household deposits market.
This Bill is primarily about Budget repair but it is of course intended to contribute to a more level playing field in the banking market.
It comes as no surprise we strongly support measures to promote competition in banking because they are very clearly needed.
There is a big problem with competition in banking in this country.
In his second reading speech, the Treasurer noted that:
- the banking sector is an oligopoly and that the largest banks have significant pricing power which they have used to the detriment of everyday Australians
- the banking system is highly concentrated
- major banks benefit from a regulatory system, including mortgage risk weight settings, that has helped embed their dominant position.
From our perspective, the most important component of the Bill is that it is intended to complement prudential reforms being implemented by the Government and APRA to improve financial system resilience and competition.
We support measures to reduce unfair competitive advantages enjoyed by the major banks.
One of these is the unfair funding cost advantage enjoyed by these banks as a result of the implicit guarantee provided by taxpayers due to the perception that the major banks are ‘too big to fail’.
COBA welcomes the major bank levy as a modest step towards reducing this funding cost advantage.
In relation to the broader prudential reforms being implemented by APRA and the Government, we note that the ‘too big to fail’ problem is the target of Recommendation 3 of the 2014 Financial System Inquiry report.
That recommendation calls for implementation of a framework in line with emerging international practice, to facilitate the orderly resolution of Australian ADIs and minimise taxpayer support.
The Government’s 2015 response has no specific implementation date, but says steps should be taken to reduce any implicit government guarantee and the perception that some banks are too big to fail.
The Government has endorsed APRA as Australia’s prudential regulator to implement this recommendation in line with that international practice.
We acknowledge that the ‘too big to fail’ problem is a very complex problem to solve but we would encourage the Government and APRA to continue to give this issue the highest possible priority.
This is because the ‘too big to fail’ problem tends to get worse over time. The unfair funding cost advantage creates incentives for major banks to become even bigger and more complex.
The 2014 Financial System Inquiry report said perceptions of implicit guarantees have costs, creating distortions in the market.
The report said credit rating agencies explicitly factor in ratings upgrades for banks they perceive to benefit from Government support, directly benefiting those banks. As has been said by previous witnesses, this was worth a two-notch upgrade for the major banks in 2014.
As of last month, at least in relation to one of the rating agencies, Standard & Poor’s, that two-notch upgrade is now three notches.
The implicit guarantee is distorting the banking market by providing the biggest players with an unfair funding cost advantage.
The regulatory framework helps the major banks in other ways.
Compared to major banks, customer owned banks and regional banks have to hold much more regulatory capital against mortgages. This gives the major banks another significant funding cost advantage.
APRA has formally designated the major banks as ‘systemically important’ and applied a capital surcharge on them of 1 per cent.
But this surcharge is right at the bottom end of the international spectrum of such capital surcharges, which range up to 6 per cent in some cases.
We have a banking market where major banks benefit from unfair regulatory capital settings and a subsidy from taxpayers.
The major bank levy is a modest but welcome step toward a more level playing field in banking.
So from our point of view, we look forward to APRA and the Government working on the broader prudential reform agenda to promote competition and resilience in the banking market.
Consumers stand to gain from a more competitive banking market where all competitors have a fair go.
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