Senate inquiry says no ‘silver bullet’ for banking competition, experts mixed on recommendations

Experts say the Senate report into competition in the banking system contains some worthwhile recommendations, but is unlikely to radically transform the key industry which survived the global financial crisis relatively well, but saw the big four lenders tighten their grip on the market.

The report, Competition within the Australian banking sector, which was released on Friday, made 39 recommendations, including the launch of a larger review into the banking sector, a reversal of the ban on mortgage fees but better disclosure of these fees upfront, and the abolition of interest withholding tax.

It also calls for the Reserve Bank of Australia to publish further information of banks’ interest margins and returns on equity, and Treasury to investigate the feasibility of personal credit ratings to facilitate borrowers moving between lenders.

Access to the Government’s wholesale funding guarantee should be set at a uniform rate of 70 basis points, the report says, rather than the existing system where bigger lenders are charged less to use the Government’s credit rating when borrowing money.

The report stresses that this is no ‘silver bullet’ for improving competition. “No single recommendation will transform the banking sector into a paragon of competition. Rather, a number of smaller recommendations are made, each of which will, if implemented, work to improve the competitive pressures within the banking market,” it says.

But KPMG’s head of banking Andrew Dickinson says in order to promote access to capital and funding for the smaller banks and non-bank lenders, two key recommendations were lacking.

First, Dickinson wants the Government to look into allowing the banking regulator to permit smaller lenders to hold less capital against housing mortgages that are most likely to be repaid.

Second, he says the tax treatment of long-term bank deposits should be made more attractive. He says a 50% tax concession on two-year-plus fixed interest securities would make deposits more attractive against property and equity investments, and better compensate for any rises in inflation.

“This would not only assist all sectors of the lending market access funding, but also help the banks increase the maturity profit of their funding to better match the long-term nature of their lending,” Dickinson said after the report was released.

Meanwhile, mortgage broker Mortgage Choice welcomes the call to reverse Federal Treasurer Wayne Swan’s plan to abolish exit fees on homeloans, saying non-bank lenders would be the most damaged by the original plan.

“Non-bank lenders, which are vital to the health of a competitive lender market, raise funds at a higher cost to their banking counterparts and lack the same economies of scale. As such, exit fees are brought in to recover their reasonable costs should a loan be discharged early,” Mortgage Choice says.

But competition and consumer law expert, Associate Professor Frank Zumbo of the University of New South Wales, has given the report the thumbs up.

“We have a serious problem in the Australian banking sector,” Zumbo tells SmartCompany. “It is highly concentrated.”

Zumbo stresses that the review calls for a nurturing of the ‘four pillars’ policy – which prevents ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corp from merging – and helps the country’s regional banks and credit unions by promoting further support for the securitisation market.

“Clearly the committee recognises that more work needs to be done,” Zumbo says, adding that Swan’s banking package last year left many issues unresolved.

“But the recommendations in this package could be implemented in their own right.”

Zumbo also supported another review, saying a well-resourced independent inquiry was necessary to work through the global financial crisis, in which Westpac bought St George, and CommBank bought Bankwest.

During the GFC, the big four banks dramatically increased their share of the mortgage market in a flight to safety, prompting calls for the promotion of a ‘fifth pillar’ in banking. When allowing AMP to take over AXA Asia Pacific’s Australian and New Zealand operations, Swan said the combined company would be well placed to become the fifth-pillar in financial services.

“We need to carefully consider where we go from here,” Zumbo says.

“The big four [banks] have a level of dominance that’s unprecedented around the world.”

“The UK is taking a serious look at divestitures, and the US and UK have tackled the issue more comprehensively.”

“At the end of the day, it wouldn’t hurt to have a wider inquiry,” Zumbo says.

But the Australian Chamber of Commerce and Industry has described the report as a “most disappointing document”, which does little for small business or consumers.

“At best, this report should be seen as a very modest first that does not take us far from Treasurer Swan’s banking reform package in December 2010. It contains little jolt to the major banks to improve the provision of finance or its terms for small business of consumers,” ACCI chief executive Peter Anderson says.