Mark Degotardi, CEO, Customer Owned Banking Association (COBA) discussed banking competition in a statement to Productivity Commission Inquiry into the State of Competition in the Australian Financial System.
They call out the implicit Government guarantee the major banks enjoy, the differential risk weights, and how the recent 10% investor loan growth speed limit adversely impacted overall banking competition.
Our members are mutual banks, credit unions and building societies.Customer owned banking institutions have market leading customer satisfaction and highly competitive pricing.
They provide the full range of retail banking products and services, including home loans, credit cards, personal loans, transaction accounts and term deposits.
What they don’t have is a level playing field.
That’s why we welcome this inquiry and we are hopeful it will recommend further action to promote competition and choice in the retail banking market.
Our sector has:
- 4 million customers
- total assets of $106 billion
- around 10 per cent of household deposits
- around 5 per cent of the home loan market.
We have a strong track record and significant potential to increase competitive pressure and innovation in retail banking but we need a fairer regulatory framework.
We look forward to engaging with this inquiry on improving the regulatory framework and on measures to empower consumers to find the best deal and the best banking services provider.
Items 4 and 5 of this inquiry’s terms of reference concern barriers to competition and potential policy changes to reduce or remove those barriers.
The Government’s position, as noted by the Treasurer in a recent speech to Parliament, is that:
- the banking sector is an oligopoly and the largest banks have significant pricing power which they have used to the detriment of everyday Australians
- the banking system is highly concentrated, and
- major banks benefit from a regulatory system, including mortgage risk weight settings, that has helped embed their dominant position.
There are a number of significant areas that we would encourage the Commission to consider:
- the impact of the implicit guarantee on competition
- the regulatory advantage gained by the largest institutions in APRA’s capital framework
- the need for customer owned ADIs to be able to raise capital to compete more effectively, and
- the need for APRA to be required to consider competition as an explicit ‘secondary objective’ in addition to its primary objectives of financial safety and stability.
Implicit guarantee
There is now widespread acceptance that the major banks unfairly benefit from an implicit guarantee provided by taxpayers. This implicit guarantee gives the major banks a significant funding cost advantage.
This unfair funding cost advantage is getting worse, with one of the major credit rating agencies recently increasing the benefit that major banks obtain in terms of a credit rating uplift.
This advantage is significant and is far higher than the Government’s recently announced levy on the 5 largest banks.
Risk weights
The major banks are gifted another funding cost advantage by the regulatory framework because they are permitted to calculate their own risk weights for the amount of regulatory capital they hold against mortgages.
This means that major banks hold much less regulatory capital against mortgages compared to their smaller competitors, and this problem is magnified for the highest quality mortgages, i.e. low risk, very low loan-to-valuation mortgages.
So, it is ‘win win’ for the major banks – they hold less capital against loans and pay less for debt.
Capital
Customer owned ADIs raise most of their capital through retained earnings and have limited access to additional forms of capital. This limits our competitiveness and our ability to make strategic investments in a range of areas including investment in technology.
The Government is currently conducting a separate inquiry process to look at capital raising for mutual and cooperative institutions in Australia and we are working with APRA to develop CET1 capital options for customer owned banking institutions.
If there is genuine commitment to competition, this issue needs to be resolved as a priority.
APRA’s competition objective
Regulators need to give more consideration to the impact on competition of their decisions.
The risk weight settings are a good example, but another example includes APRA’s implementation of its macroprudential crackdown on investor lending.
APRA’s 10 per cent cap on investor lending growth entrenched the major banks’ share of this market and undermined competition. Investor lending made up 40 per cent of major banks’ home loan portfolios, almost double the proportion of our sector.
There is an issue with competition and this decision simply embeds the existing problem.
Our sector has a strong record of prudent lending and we support APRA’s efforts to promote sound lending standards. However, APRA’s blanket investor lending intervention has harmed our sector’s competitive position and enabled the major banks to reprice their investor loan portfolios without fear of losing market share – increasing their profits and further entrenching their dominance.
We think that future problems of this kind could be avoided or minimised if APRA’s legislative mandate was changed to include an explicit “secondary competition objective.”
This would require APRA to think more about the impact on competition in pursuing its primary objectives of financial safety and stability and to be more accountable by reporting annually against the secondary competition objective.
Customer owned banking institutions are nimble and closer to their customers than their larger competitors but they don’t have the same economies of scale to keep costs down. Our members often used aggregated structures to achieve scale, and are frequently at the forefront of implementing technology innovations for their customers.
However, the costs of regulatory compliance are more difficult to mitigate and involve basic fixed costs that larger entities can spread over a much larger asset base.
Increasing the focus of regulators and policy-makers on the impact of regulatory compliance costs, and minimising those costs where possible, will promote competition.
Open Banking
COBA welcomes the Government’s announcement that it will introduce an open banking regime to increase access to banking product and customer data by consumers and third parties. We support policies that benefit consumers and allow them to find banking products better suited to their needs.
Open banking will allow COBA members to offer new services, like tools for their customers to better manage their finances.
However, if participation in open banking is mandatory and if the implementation timetable is too aggressive, it could harm competition by imposing unacceptable costs on small players – to the detriment of their customers.
The same arguments apply to mandating participation in comprehensive credit reporting and demonstrate why it is critical that competition must be a significant consideration in the determination of the regulatory framework and the process of setting Government policy in banking and financial services in Australia.
Often the promotion of competition is portrayed as a threat to stability.
Those who promote this idea are the institutions that have a vested interest in maintain the banking oligopoly.
Fairer competition and financial stability are complementary aims. A more diverse banking sector will strengthen the resilience of the system and deliver better outcomes to consumers.
There is a problem with competition in banking – the only question is what we as a community are prepared to do about it.
