Banking Review

The people take a hit

The gloves are off as the Government and Opposition wade into
the ring on the Commonwealth Bank’s latest mortgage rate rise

BY CHARIS PALMER

November’s 0.45 per cent mortgage rate rise by the Commonwealth Bank should sound a huge wake-up call for the Australian Competition and Consumer Commission, says Mortgage Choice chief executive officer Michael Russell.

The rate rise has raised the ire of the Government and the Opposition, with calls for new banking reform, but Russell says the ACCC must take some of the blame for approving bank takeovers that have reduced competition.

“The ACCC needs to be accountable for the consequences of its actions over the past 10 years,” says Russell. “In the mid-eighties, the Government at the time recognised the need to issue 16 new banking licences and they did that to protect the consumer in the years to come. They issued these licences to foreign banks to stimulate competition and product innovation in the best interest of consumers.

“And what’s happened over the past 20 years? The governments have all capitulated and they’ve allowed, with the ratification of the ACCC, all these bank takeovers to occur.”

Russell says the industry is now back at the same point it was in the seventies and early eighties. “At the moment, the banks can do what they want without fear of consequence because there is really only four alternatives.”

Shadow Treasurer Joe Hockey agrees, and has made nine policy suggestions, including a full review of the financial system, similar to the Wallis Inquiry of 1996. Hockey says, “The ACCC waived through mergers of lenders it would never ordinarily permit, as it has acknowledged… These actions have irreversibly changed our financial landscape.”

Hockey is also calling for the Treasury and Reserve Bank to investigate ways to improve further the liquidity of the residential and commercial mortgage-backed securities markets, which are an alternate source of funding for smaller lenders.

Calls for incentives
Russell says, “The Government needs to put some more incentives in place to stimulate foreign banks and it needs to put some incentives in place to better support the non-bank lenders in this country”.

The Australian Bankers’ Association says there is no evidence to support the claim that there is insufficient competition in banking, but has agreed with six items in Joe Hockey’s nine-point proposal. The ABA says that most of the policy recommendations are either existing in the current marketplace or would be welcome. But it disagrees with the suggestion that the ACCC should be given powers to crack down on price signalling, arguing banks should not be restricted from engaging in discussion and debate about rates.

ABA chief executive Steven Munchenberg says, “Bank customers have a right to an explanation regarding what is happening with banks’ funding costs and interest rates”.

Meanwhile, Bendigo and Adelaide Bank has thrown its support behind a Senate Economics Committee inquiry into banking competition planned for December.

Bendigo and Adelaide Bank chairman Rob Johanson told the ABC’s Inside Business an inquiry would be worthwhile if it provides the industry with a better articulation of what communities expect from banks. “We have invested huge amounts in the banks over the past couple of years. I think the Government is now up to a trillion dollars in guarantees for funding and deposits in banks. So it’s very appropriate that the political system as it were sits back and makes some judgment about what its expectations of the whole banking system are.”

Shareholder reality check
Russell says banks will continue to face a conundrum as shareholders are put first and continue to demand greater returns: “Banks are doing this because they are primarily accountable to their shareholders and the shareholders are demanding from the banks increasing returns every year.”

Johanson says with the Government continuing to provide bank guarantees, shareholders must realise a high return on equity is not sustainable. “If people are expecting that 20 per cent return from banks, year in year out is achievable… I think that’s unrealistic.”

The mutual sector has stepped up its campaign asking for Government and regulators to promote the fact that credit unions and building societies are as safe as banks and are regulated to the same high standards. Louise Petschler, the chief executive officer of mutual industry association Abacus says, “We have put forward some ideas on how to cut through with this message, such as changing the technical Banking Act term ‘Authorised Deposit-taking Institution’ – which means nothing to consumers – to clearer language, like ‘Authorised Banking Institution’”.

Mutual lender Greater Building Society says it has experienced a massive increase in calls from unhappy bank customers looking to swap their home loans and other accounts. The day after the Commonwealth Bank announced its rate rise, the building society says it received a 200 per cent jump in appointments made through its home loan centre.

“We are owned by our members, not shareholders, so we put people before profits,” says Greater Building Society chief executive officer Don Magin.

The Coalition’s nine suggestions for banking reform
1)  Give the ACCC power to investigate collusive price signalling.
2)  Encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns.
3)  Formally mandate the RBA to publish regular _ rather than irregular _ reporting on bank net interest margins, returns on equity and profitability.
4)  Investigate David Murray’s proposal for Australia Post to make its 3,800 branches available as distribution channels for smaller lenders.
5)  Ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage-backed securities markets.
6)  Explore further simplification of the Financial Services Reform Act, to make doing business easier and simpler.
7)  Direct APRA to explore whether the risk-weightings on business loans secured by residential properties are punitive.
8)  Commission a resolution to the debate about whether the banks should be able to issue ‘covered bonds’, in the same way other jurisdictions allow their banks to.
9)  Conduct a full review of the financial system.