Productivity Commission Banking Inquiry: Recent Submissions of Interest
Monday 25 September 2017 @ 11.15 a.m. | Trade & Commerce
The Productivity Commission (the Commission) inquiry into the Banking System was announced by the Federal Treasurer Mr Morrison in May 2017 as part of the federal budget process which also included the new Bank Levy announcement (see Major Bank Levy Bills Introduced). In broad terms the Commission was tasked by the Treasurer, to look at: how to improve consumer outcomes; the productivity and international competitiveness of the financial system and economy more broadly; and how to support financial system innovation, while balancing financial stability objectives. The Commission began this work in July 2017 and while it is not due to report until July 2018, it has received some 31 key submissions from interested parties, two of the more interesting ones being from the "regional banks" and the Customer Owned Banking Association (COBA) seeking more consideration of the "market power" of the big banks and the concept of "too big to fail" often applied to the big banks.
Background - Terms of Reference
In briefing the Commission the Treasurer outlined the following five key areas of investigation to be addressed in the in the Commission's final report to the Government:
- Consideration of the level of contestability and concentration in key segments of the financial system (including the degree of vertical and horizontal integration, and the related business models of major firms), and its implications for competition and consumer outcomes;
- An examination of the degree and nature of competition in the provision of personal deposit accounts and mortgages for households and of credit and financial services for small and medium sized enterprises;
- Comparison of the competitiveness and productivity of Australia's financial system, and consequent consumer outcomes, with that of comparable countries;
- Examination of the barriers to and enablers of innovation and competition in the system, including policy and regulation;
- The prioritisation of any potential policy changes with reference to existing pro-competition policies to which the Government is already committed or considering in light of other inquiries.
In carrying out the inquiry the Commission is required to have regard to the Government's ". . . existing wide-ranging financial system reform agenda" and its aims outlined in the terms of reference. Further, the Commission is to consult with consumers, financial institutions and the agencies regulating the financial system, specifically: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (the RBA), all of whom the Government has asked to consider making submissions on matters that relate to their areas of expertise.
Regional Banks
The regional banks submission was reported on by the ABC News which indicated that the Commission will look at whether the big four banks [Westpac, ANZ, CBA and the NAB] have an "unfair advantage" over smaller regional players through the ". . . Government's implicit guarantee for bank deposits". The ABC News reports Bank of Queensland chief executive Jon Sutton as singling out the implicit guarantee of bank deposits as being something that ". . . tilted the playing field in favour of the major banks" by underpinning their credit rating.
Further, when ratings agencies consider the major banks they usually end up enjoying a higher credit rating than regional banks and get a funding benefit as a result of government backing in the event of a crisis. This was not the case recently where because government support was not factored in, 23 financial institutions including Bank of Queensland and Bendigo and Adelaide Bank were downgraded by ratings agencies. This the ABC News reports means regional banks remain at a competitive disadvantage because of the ". . . systemic weight of major banks on the economy".
Customer Owned Banking
The submission of the COBA (submitted 15 September 2017) makes some important points regarding competition and regulation. COBA is owned by its 72 member institutions being 51 credit unions, three building societies, 16 mutual banks, two others and a number of affiliate members.
Its submission points to the problem with competition in the Australian banking market, saying that the lack of competition contributes to a ". . . lack of competition" which ". . . can contribute to inappropriate conduct by firms, and insufficient choice, limited access and poor quality products for consumers."
It points out that the prudential regulator APRA’s consideration of the impact on competition of its approach to regulation has improved since the Financial System Inquiry but in COBA’s view has been inadequate and inconsistent and points to several examples, namely:
- a lack of urgency in addressing the market distortions caused by the unfair funding cost advantage enjoyed by the major banks due to the implicit guarantee;
- the continuing wide gap in mortgage risk weight settings between the major banks and smaller banking institutions;
- implementation of macro-prudential measures affecting investor lending and interest only lending;
- lengthy delays in accommodating the customer owned banking sector in the regulatory capital framework, and
- prohibition on credit unions and building societies using the term "banking" in a registered corporate, business or trading name or internet domain name.
To address the above COBA recommends, in its submission, the amendment of APRA’s statutory mandate to include an " . . . explicit 'secondary competition objective’ (SCO)". The idea behind the SCO being that it would remain secondary to APRA’s primary responsibilities of financial stability and safety but in making policy in pursuit of its primary objectives APRA would be required to do so in a way that facilitates effective competition, as far as reasonably possible. Such a measure would include reporting obligations to ensure ". . . accountability against the objective". COBA in its submission points to APRA’s equivalent in the UK, saying it was given a SCO in 2014 and the outcome has been a “. . . material change of gear” where “competition is gaining airtime and traction at all levels” and “ . . . there are numerous instances where competition considerations have influenced policy outcomes.”
The Commission's inquiry has several more months to run with its final report due in mid 2018.
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