Author: Don Magin

Consumers and business will benefit from independent inquiry into banking system

Now that the major banks are too big to fail, an independent inquiry into Australia’s banking system is the only way to ensure Australian consumers and businesses get the financial reward from competition and choice in the long-term writes our CEO Don Magin.

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A major report by Deloitte Access Economics, released this week, has called on the Federal Government to commission an independent inquiry into Australia’s financial system.

Not another inquiry I hear you cry. This inquiry will make a difference to the back pockets of Hunter people and businesses. Here’s why.

The Competition in Banking Report written by Professor Ian Harper (who was a member of the Wallis Inquiry into the financial system in the 1990s) makes a strong case for the fact that, post the global financial crisis (GFC), competition is being eroded by the dominance of the major banks and new regulations to stabilise the financial system will favour them.

Having strong, well run, major banks is a good thing. The problem is that the pendulum has swung too far towards stability and too far away from competition. The major banks now have an unfair competitive advantage over other financial institutions which is weakening the competitiveness of Australia’s banking system and ultimately hurting consumers and businesses.

The major banks swallowed up a number of competitors during the GFC. Bankwest and Aussie Home Loans are owned by the Commonwealth Bank. St George Bank, RAMS and Bank of Melbourne may trade under their own names and logos, but they are owned by Westpac. Banks share of new housing finance commitments has gone from 78 per cent in 2007 to around 90 per cent today. The major banks’ share of total deposits has increased from 75 percent to 80 percent in the same period.

Parts of regional NSW and the Gold Coast are fortunate to have strong, well-managed, mutual (customer-owned) financial institutions who also survived the GFC in good shape, offering competition to the major banks. These building societies, credit unions and mutual banks offer consumers competitive rates, generally lower fees and superior service to the major banks.

If competition is here, what’s the issue? The mutuals are offering competition for the benefit of local people with one hand tied behind their backs. They need a more level playing field to ensure the competition is sustainable.

For example, while The Greater’s standard variable home loan rate is almost half a percent lower than the average of the major banks, it costs The Greater more than the banks to provide the loan. With stronger credit ratings, major banks enjoy access to a broader range of funding sources at cheaper rates, including the ability to borrow overseas.

Banks and other financial institutions are all subject to the same regulations but proposed new regulations will also favour the big banks. Under the new Basel lll arrangements all financial institutions will have to hold higher levels of liquidity. Organisations like The Greater will be able to meet new liquidity arrangements but, unlike the banks, it will not have the potentially cheaper option of borrowing directly from the Government. The regulations encourage banks to build retail deposits, such as savings accounts and term deposits. Mutuals rely extensively on these deposits to fund their lending. As the banks’ retail deposits represent a lower proportion of their overall source of lending finance, they are able to sacrifice margin to push up rates on these deposits. A short-term win for some savers and investors but at the expense of competitive loans.

Because mutuals are customer owned organisations, not driven by shareholder demands for better returns and higher profits, they have been able to absorb these costs to continue to be competitive and continue to fund local community, sporting and charity organisations.

Deloitte Access Economics has shown that cheaper funding costs for major banks and more regulatory burden on smaller players has led to less competition. Without sensible review and action, this will lead to less choice and worse outcomes for consumers in the future.

The Government has introduced several welcome reforms to support the growth of a fifth pillar in the banking system to give consumers more choice and competition. The impact of these reforms has been minor. We need major reform of the Australian financial system which only an independent inquiry can achieve.

Australia hasn’t reviewed its financial system since the Wallis Inquiry. Times have changed. It is time to have an in-depth inquiry to improve competition and get a better deal for consumers. Australia is fortunate have a strong and stable banking sector. This puts us in the perfect position to ensure the sector remains strong and competitive for the decades ahead. We must conduct this review now.

I encourage you to read the report and judge for yourself.

Note: Don is also chairman of ABACUS, the mutual banking sector industry association. ABACUS commissioned the report. A version of this blog appeared in today's Newcastle Herald as an opinion piece.

Meanwhile, a study commissioned by Bankmecu shows that consumers believe the top four banks unfairly dominate the sector with a combined market share of up to 90 per cent A majority of people covered by the study, 66 per cent, said there should be more competition to the big banks from smaller lenders.

Do you think that there is enough competition in banking? Share your thoughts below.