Summary and recommendations
An observed reduction in competition in Australia's banking
sector in the wake of the global financial crisis (GFC), combined with the
public outcry over a number of high profile decisions by the major banks,
prompted this inquiry.
The global financial crisis: stability and competition
This report is being written in the aftermath of the GFC. In
most respects the Australian financial system has recovered from the GFC better
than those is many comparable countries. There does not seem to be an overall
problem of lack of access to credit, although some banks may still be
excessively cautious in certain areas, such as lending to small business, and
borrowers that formerly relied on non-bank lenders funded through
securitisation markets may be having difficulty finding finance, despite strong
As usual with financial crises, investors and customers showed
a 'flight to quality', moving to longer established and larger financial
intermediaries as they perceived these to be safer. At the same time, policymakers
in Australia, as prudence demanded, accorded greater priority to the immediate stability
of the financial system. The net effect, together with other forces at play
during this period (including the relative inability of smaller insitutions to
access funds at a competitive price) has led to a more concentrated banking
market than existed prior to the financial crisis, with the 'big four' banks
increasing their dominance across most if not all banking markets.
The committee considers that this increase in concentration has
the potential for consequent undesirable impacts on competition.
Accordingly, as the threat to stability posed by the GFC
subsides, it is appropriate that priority turn more to achieving an appropriate
longer term balance between stability and competition. The Committee notes that
the need to do so is a matter of public debate and that the Government has
taken some steps in this direction but the Committee considers additional steps
are required and this report describes some further measures that could be
implemented. Action should be taken to remove obstacles to increased real
competition and to facilitate opportunities for new and existing players in the
banking markets to compete actively for business.
To that end, the Committee believes that, in general,
competition rather than regulation will generate improved outcomes for
customers. It agrees with Treasury that:
Competition is the cornerstone of efficiency and productivity
in any market. It promotes fair prices, enhances living standards and ensures
that scarce resources are allocated to their highest value uses.
Having identified some shortcomings in competition, the
Committee suggests remedies. There is no 'silver bullet'. 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
A broader inquiry into the
Nor does the Committee believe that its recommendations, which
focus on competition, exhaust all the possible useful reforms to the
financial ssytem. The Committee supports a broader independent inquiry. Such an
inquiry's work would be facilitated by more information being provided on bank
A model for such an inquiry could be provided by the five main
inquiries into the Australian banking system described in this report; namely
the 1937 Royal Commission, the Campbell Committee, the Vic Martin Review Group,
the Stephen Martin Report and the Wallis Report.
3.91 The Committee recommends that a broad ranging
inquiry into the Australian financial system be established, modelled on that
conducted by the Campbell Committee. The terms of reference should be broad,
covering the role of banks and other financial institutions in a post-GFC
financial environment. The inquiry should be well resourced and have its own
secretariat, independent of government departments.
4.111 The Committee recommends that the Reserve Bank
publish further regular information on banks' interest margins and returns on
equity; and compare these to returns in other industries to allow an assessment
of whether risk‑adjusted returns in the banking sector are sufficiently
high to suggest that competition is inadequate.
Banks' home loan interest rates
There is a widespread belief that the banks' variable home loan
rates should follow (and only follow) movements in the Reserve Bank's policy
rate (the 'cash rate'). This belief has been reinforced by the banks generally
behaving in this way for a number of years and a consequent mis-belief that the
banks' costs of funds is directly and significantly dependent on the cash rate.
The banks' costs of funds do not, however, always move in line
with changes in the Reserve Bank's policy rate. Decisions by the Reserve Bank
to change the cash rate are made solely to attempt to deliver inflation
outcomes within its statutorily defined target range. These changes will have
some impact on the cost of banks' funds but are not necessarily a primary
driver of those costs, which are subject to many influences other than the
Reserve Bank's cash rate.
It is reasonable that banks should be able to set their lending
rates taking into account their overall cost of funds. When events such as the
GFC, or a prudent move towards seeking longer-term and more stable funding,
pushes up their cost of funds at a faster pace than the Reserve Bank is
increasing the cash rate, it is understandable that banks will seek to increase
their lending rates by more than official cash rate increases to cover those
costs. A truly competitive market, however, will limit the extent to which
banks can increase their lending rates and other fees to recover such increases
in costs plus a small profit.
Similarly, as banks replace expensive borrowings during the GFC
with cheaper funds (which may already be occurring), their average cost of
funds will fall and, in a competitive market, customers should expect to see a
reflection of this in lower home loan interest rates (or increases below those
made to the Reserve Bank's policy rate).
For borrowers with a strong desire for their home loan rate to
have an explicit linkage to the Reserve Bank's policy rate, the Committee
welcomes the initiative by some lenders to provide 'tracker loans' which
provide this certainty.
But importantly, if the banks increase their loan rates by
more than the Reserve Bank's adjustment to its cash rate, it does not
mean that borrowers are paying higher rates on their loans (in any other than a
very short-term sense). The average loan rate is essentially where the Reserve
Bank believes it should be in order to meet its medium‑term inflation
target. If the banks expand their margin over the cash rate, then the Reserve
Bank will set a lower cash rate than they would otherwise have set.
Profitability and concentration in the banking industry
Even during the period of the GFC, when the real economy slowed
markedly, the profits of the major banks held up well. The returns they offer
investors more than match those from other comparable industries, despite the
explicit and implicit government support they receive and the expectation by
the market that they are 'too big to fail' which makes banking a less risky
While the Committee prefers banks to be profitable rather than
unprofitable, their very high profits are ultimately paid for by households and
small businesses. They are also a reflection that competition is not as keen as
it should be. This conclusion was reinforced by the finding that the Australian
banking market is highly concentrated. The Committee would accordingly be
concerned if there were any further increase in concentration. The Committee
therefore strongly supports the retention of the 'four pillars' policy preventing
any merger between the four major banks. It also urges the Australian
Competition and Consumer Commission (ACCC) to take a strongly sceptical view
towards any proposal for one of the four major banks to take over one of the
remaining regional banks.
The Committee views forced divestiture as a major intervention
in a free market and regards it as a 'last resort' approach to increasing
competition. The Committee prefers other means of increasing the number of
players in the market. With the change to an explicit form of deposit
insurance, a consideration of impediments to foreign banks offering stronger
competition, such as the preference for foreign banks to operate as
subsidiaries rather than branches, could be reviewed as part of the broader
review of the financial system. This same review could also examine means
whereby current non-banks could more directly compete with banks. This could
include an examination of the restrictions on ownership arrangements for
Reducing barriers to customers moving between financial intermediaries
The costs and other impediments to moving between banks are
important factors with the potential to weaken competition significantly. One
such impediment is excessive exit fees on variable rate home loans. The
Committee notes the importance of fees in underpinning the business models of
non-bank lenders which bring competitive pressures to the market and that an
outright ban will reduce competition from this sector. The Committee believes
that banning exit fees may lead to higher upfront fees, including for borrowers
who currently never incur exit fees. It is notable that the only financial
intermediaries that openly welcomed the abolition of exit fees were the major
Rather than moving to an immediate ban, the Committee favours
giving the new consumer protection provisions a chance to work. These
provisions, which restrict exit fees to reasonable amounts, only came into
effect less than a year ago and are not yet well known or well utilised.
It is important, however, that borrowers are made fully aware
of the extent of exit fees at the time they take out their loans.
7.34 The Committee recommends that the Government
reconsider its decision to ban exit fees, before the amended regulations come
into effect, with a view to allowing enough time for the effectiveness of the
existing ban on unfair and unconscionable exit fees (as implemented through
ASIC Regulatory Guide 220) to be assessed. If
it proceeds with the ban, it should only apply to authorised deposit-taking institutions.
10.33 The Committee recommends that the
Government introduce regulation of mortgage early exit fees (including deferred
establishment fees), requiring disclosure of these fees upfront in a simplified
and comparable format.
7.35 The Committee recommends that lenders be required
to inform borrowers when they take out a loan of the provisions of the National
Consumer Credit Protection Act 2009 which relate to unconscionable charges.
7.36 The Committee
recommends that borrowers be required to sign off on a form clearly disclosing
any exit fees applicable to their home or small business loan before making any
7.37 The Committee recommends that lenders charging
exit fees be required to explain on their website how the exit fee relates to
As well as excessive exit fees, the Committee identified other
barriers to customers moving between lenders, which it believed should be
7.49 The Committee
recommends that lenders mortgage insurance always be made either pro-rata
refundable or transferable and that this be made clear to borrowers.
7.50 As an alternative,
lenders mortgage insurance should be payable by instalments (eg. monthly,
quarterly or annually) rather than as an upfront lump sum payment (as occurs in
7.73 The Committee recommends
that the Government ask Treasury to investigate the feasibility of personal
credit ratings to facilitate borrowers moving between lenders.
7.99 The Committee recommends that the abolition of
stamp duties on refinancing of mortgages be placed on the agenda for the
forthcoming tax forum and that the agreement on their abolition be implemented.
Allowing customers to readily transfer their saving and
transactional banking between banks and other deposit-taking institutions is
7.131 The Committee
recommends that a scheme based on those in Europe be introduced requiring a
bank, upon being advised that a customer has left for a new bank, to reroute
all direct debits and credits for 13 months and provide the new bank with
details of those direct debits and credits.
Greater disclosure of information
The Committee believes better disclosure of information would
help make the banking market more competitive.
7.69 The Committee
recommends that the Reserve Bank and the Australian Prudential Regulation
Authority draw on their data collections to publish regular information about
the total cost of home loans (based on standardised assumptions on the average
size and term) for the twenty largest ADI home mortgage lenders.
7.70 The Committee recommends that a working group be
set up including Treasury, the Australian Prudential Regulation Authority, the
Australian Securities and Investments Commission, the Australian Competition
and Consumer Commission, the Reserve Bank, the Financial Ombudsman Service, the
Australian Bankers' Association, Abacus, consumer representatives and relevant
academics to develop standardised words for financial products and their
characteristics to allow consumers to more readily compare offers from
different financial intermediaries.
7.93 The Committee
recommends that banks should be required to contact customers before the expiry
of term deposits advising them of the rate that will apply if they are
automatically renewed and the current 'special' rates available.
Promoting more competitors
In terms of institutions, the most promising approach would be
to enhance the ability of existing Australian non-bank institutions to compete
with the banks and to facilitate further competition from foreign banks. Some of
these measures involve easing taxes on them, and so will have an impact on
revenue. But the Committee regards these measures as more effective than
creating a development or rural bank or converting Australia Post into a bank. The
Committee appreciates Australia Post's role in delivering banking services to
some rural and regional areas. It is commendable that it provides services on
behalf of a number of financial intermediaries and thereby promotes
competition. Australia Post should continue to seek opportunities to improve
access to financial services.
11.73 The Committee recommends that mutual financial
intermediaries be allowed to refer to themselves as a 'mutual bank' or
'approved banking institution' and use terms such as 'credit union bank' in their
15.24 The Committee recommends that the Government
require Treasury to review the GST input tax arrangements for mutual financial
intermediaries having regard to the comments in the Henry Tax Review.
15.33 The Committee recommends that the Government
require Treasury to review the treatment of building societies and credit
unions in the franking credit arrangements and report publicly on the
advantages and disadvantages of various options.
11.78 The Committee recommends that financial
intermediaries not supervised by the Australian Prudential Regulation Authority
be required to state clearly that funds placed with them are 'not guaranteed by
government' but otherwise should not be prohibited from applying familiar terms
such as 'debenture' where this would not be misleading.
15.10 The Committee
recommends that interest withholding tax be abolished as budgetary
circumstances permit to increase the ability of foreign banks to compete in the
15.37 The Committee recommends that the Government
require Treasury to review the abolition of the LIBOR cap to the tax
deductibility of interest paid by a foreign bank branch on borrowings from its
14.82 The Committee recommends that the Government direct
the Australian Competition and Consumer Commission to conduct an examination
of barriers to competition in the Australian payments system and publicly
report by the end of 2011 on any legislative or other reforms that would
enhance competition and efficiency in the provision of payment, clearing and
The securitisation market
The contraction in the securitisation market has had adverse
consequences for competition. It represents an over-reaction to the deficiencies
in some areas of the market that became evident during the GFC. With private
sector institutional investors becoming unreasonably risk averse, there was
bipartisan support for the government, through the Australian Office of
Financial Management, supporting the market by purchase of residential
mortgage-backed securities. The Committee supports a continuation of this
programme for now, although of course it should not continue indefinitely. The
Committee is keen to encourage the securitisation market as a means of
promoting competition and therefore endorses a number of suggestions made to it
to strengthen the securitisation market.
13.29 The Committee recommends that the Government ask
the Australian Prudential Regulation Authority to review aspects of its
prudential framework to ensure that there are no inadvertent impediments to the
issuance and trading of bullet bonds.
13.38 The Committee recommends that, in order to retain
incentives for careful credit assessment, an authorised deposit-taking
institution which securitises a loan portfolio be required to keep a proportion
of the resultant asset-backed securities on its balance sheet and hold
appropriate levels of capital. The proportion should be set by the Australian Prudential
Regulation Authority in consultation with the Australian Securities and
Investments Commission to balance incentives to maintain credit standards with
the desirability of encouraging the recovery of the securitisation market.
13.42 The Committee, having more confidence in the
Australian Prudential Regulation Authority's oversight than in the opinions of
credit rating agencies, recommends that the Reserve Bank accept as eligible
paper for repurchase agreements long term debt issued by any authorised
deposit-taking institution rather than just those rated above A.
13.58 The Committee recommends
that the Australian Office of Financial Management programme be expanded to
include asset-backed securities based on assets other than home mortgages and
to include securities rated AA or A (rather than just AAA) or issued by a
financial intermediary supervised by the Australian Prudential Regulation
13.59 The Committee recommends
that the Australian Office of Financial Management be given the discretion to
purchase residential mortgage-backed securities issued by entities with a
substantial bank shareholding where it judges this would promote a more
Committee recommends that the Government commission a survey of potential
demand for types of asset backed securities.
Committee recommends that the broader inquiry into the financial system
investigate ideas that may further the participation of smaller lenders in the
securitisation market, such as greater standardisation and disclosure,
liquidity support for securities issued by mutual ADIs meeting certain quality
standards and better co-ordination between regulators.
Committee recommends that Treasury develop a plan to introduce a support
programme for RMBS similar to that operating in Canada in case a future
deterioration in the securitisation market requires its introduction.
13.107 The Committee recommends
that the Government establish a working group with an independent chair,
representatives from Treasury, the Australian Prudential Regulation Authority,
the Reserve Bank, and the banking and superannuation industries, and also
including academic experts, to explore and assess options that could promote
investment in deposits and fixed income assets by superannuation funds and
other funds managers.
Anti-competitive price signalling refers to a corporation conveying
to its rivals its future price intentions. By so doing, the corporation
eliminates uncertainty about the price of its goods or services, thereby
reducing the risks of competition and impeding the functioning of a competitive
The Committee believes that there is a need to address price
signalling through an amendment to the Competition and Consumer Act 2010.
It agrees with the ACCC that the Act is currently inadequate to prohibit
statements which relay to the market the future pricing intentions of a company.
Care needs to be taken, however, that new legislation should not prevent
legitimate communication of pricing information that is not anti-competitive in
its intent or effect. The Committee believes that it is better for a bank
engaging in anti-competitive price signalling to go undetected than it is for a
bank conducting legitimate communications to be inappropriately penalised. In
this vein, the Committee is concerned that the Government's over-reliance on
the proposed new ACCC notification regime in its bill may be cumbersome and
restrictive for the banks, as well as a burden on the ACCC. The far better
alternative is to replace the prohibitions with a competition test that applies
to both public and private communications.
8.95 Subject to the release
of the Government's independent legal advice, the Committee recommends that the Competition and Consumer Act 2010 be amended to include a provision
which states that a corporation engages in price signalling if it communicates future
price-related information to a competitor, and the communication of that
information has the purpose, or has or is likely to have the effect, of
substantially lessening competition.
8.97 The Committee recommends that an amendment to the
Competition and Consumer Act 2010 to introduce a price signalling
provision should be accompanied by ACCC guidelines providing:
examples of the type of communication that would fall foul of
examples of the type of communication that would not fall foul of
this provision; and
the protection offered by the exemptions.
Supervision of the financial system
There is much to be proud of in Australia's financial system at
present, especially contrasting the performance here with how other countries'
banking systems fared during the GFC. A strong supervisory system made an
important contribution. But this should not be regarded as a reason for
complacency. The proposed independent review of the financial system should
include an examination of the extent to which the good performance reflected
the structure of the Australian Prudential Regulation Authority, its current
personnel or an element of good luck.
Automatic teller machines
The Committee commends the Reserve Bank for requiring ATMs to
display fees before the customer completes the transaction. The Committee hopes
this will in time lead to greater competition and ATM providers will advertise
machines with lower fees. Measures to cap ATM fees would be counterproductive
as they would lead to ATMs being removed from some remote locations.
14.45 The Committee
recommends that the Australian Payments Clearing Association and the Australian
Bankers' Association encourage their members to have their ATMs screens display
a real-time warning to consumers where a penalty fee will be imposed if a
particular transaction goes ahead.
Ensuring adequate community access
to financial services
The Committee recognises that banks are accorded a special
status and given special privileges. In exchange they have social obligations
to provide banking services to the broad community. These are obligations that
the banks should meet voluntarily rather than compulsorily. In areas where there
are unmet demands for basic banking services which the government believes on
social grounds should be provided to disadvantaged members of the community,
the government should invite banks to tender to provide the services and the
government pay to ensure they are provided.
14.46 The Committee recommends that the government deal
with the problem of excessive ATM fees in remote indigenous communities by
tendering for an ATM provider to install a network of ATMs in these areas which
make specified minimal charges for balance enquiries and low charges for cash
Government guarantees for the financial system
The Committee believes providing temporary guarantees for
bank funding was the correct response to the GFC but it could have been
introduced more adroitly. The differential pricing for the gurantees
exacerbated the 'flight to quality' to the major banks and had an adverse
impact on competition.
12.36 The Committee recommends that, to increase the
competitiveness of smaller lenders, the Government immediately standardise the
fee for all borrowers under the wholesale funding guarantee to a uniform rate
of 70 basis points.
12.53 The Committee recommends that the financial claims
scheme should be retained in its current form pending the outcome of a full
inquiry into a deposit insurance scheme, possibly charging risk-related premia.
The inquiry should also examine the issue of guaranteeing non-ADI products that
are close substitutes for deposits, with a view to being better placed to
provide such a guarantee as future need arises.
The Committee supports the introduction of the 'Government
Protected Deposit' symbol as a means of allowing mutual and smaller ADIs to
compete on a more equal footing.
Taxation and related measures
Some other changes that could also foster competition were
15.18 The Committee recommends the
taxation arrangements applied to bank deposits and mutual ADI deposits should
be reviewed by the inquiry into the financial system.
15.48 The Committee recommends that the Government
require Treasury to review the operation of the First Home Savers Accounts
scheme and report publicly on the advantages and disadvantages of various
Small business finance
Since the GFC, finance for small business has become more
expensive, both absolutely and relative to housing loans. This appears to
reflect a mix of banks more prudently acknowledging the risks in various types
of lending and some reduction in competition.
6.42 The Committee recommends that the Australian
Bankers' Association meet with small business representatives to develop a code
of practice specifically relating to lending to small business.
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