Additional Comments by Senator Xenophon
With the four major banks holding around three quarters of Australia's deposits
and assets, and 87 percent of home loans, the lack of choice between financial
institutions for consumers effectively means that the "big four" have
free reign to do as they please.
Over the years, Australia's banking sector has significantly shrunk.
"In October 2007, the Australian mortgage market was
serviced by over 150 financial institutions offering 2,117 home loan products.
In November 2010, this had fallen to 100 financial institutions offering 1,600
In a survey conducted by the Chamber of Commerce and Industry
Queensland, almost 90 percent of respondents agreed that there should be more
competition in the banking industry.
A separate survey found 72 percent of Australians thought the big four banks in
Australia have too much market power.
Bank profits up, but so are interest rates
During the recent global financial crisis, Australian consumers had to
reduce their spending, yet it seemed the profits of Australia's big four banks were
as high as ever.
An online poll conducted by Fairfax newspapers in October 2010 asked:
Do you think commercial banks would be justified in either
moving early to raise rates or lifting them by more than the Reserve Bank when
Yes, banks are paying more for their money so borrowers should
expect to pick up the tab 16%
No, banks are earning huge profits and can afford to absorb
the extra costs 80%
Too hard to tell 4%
Then, on Melbourne Cup Day in November 2010, Australians were outraged
when the Reserve Bank increased interest rates by 25 basis points but the big
four banks increased their standard home loan rates, on average, by 40 basis
This followed the Commonwealth Bank posting a net profit for the full
year ending 30 June 2009 of $4.7 billion, ANZ, $4.5 billion, National Australia
Bank $3.8 billion, and Westpac, $4.6 billion.
(And, in the first week of May 2011, ANZ and Westpac announced record
half-year profits – ANZ, $2.66 billion, up 38 percent and Westpac, almost $3.2
billion for the half-year, up 7 percent.)
During the Committee Inquiry, the CEOs of the major banks explained to the
Committee that their cost of wholesale funds had increased, hence the rise in interest
However this has been a bitter pill to swallow for Australian consumers
who have only watched the banks celebrate record profits while they have had to
tighten their belts.
Greater transparency by the banks around the decision making process for
increasing interest rates would better inform consumers. Each month, banks
should be required to publish on their websites specific reasons for increasing
or decreasing their standard home loan rates, whether in line with, outside of
or above, the RBA’s cash rate.
Furthermore, any time delay between the RBA’s decisions and the banks’
change in rates should be explained, especially where the RBA has lowered the
cash rate and the bank has not followed suit.
This additional information will enable consumers to better assess their
banks and have greater awareness for their justification for increasing
interest rates and will help consumer more easily identify, at least on this
issue, which bank they prefer.
The need for a ‘fifth pillar’
In 2008, Westpac acquired St George Bank, then Australia’s fifth largest
bank. The loss of competition by this move attracted a lot of commentary during
Mr Carter—We had very vigorous exchanges with the ACCC
around that, particularly the St George merger. We made it crystal clear to
everybody we spoke to and particularly the ACCC that if they green-lit that
merger they would essentially end competition against the big four... We had a
fifth pillar; it was called St George, and Westpac were allowed to purchase it.
We think that the ACCC completely went missing at a time when they needed to
stand up...A thousand people lost their jobs as a result of that merger, and
there are probably 2,000 or 3,000 more people who are going to lose their jobs.
With the fall of St George, we have lost the only genuine competitor to the big
four...No-one has won out of that."
Associate Professor Zumbo—There is absolutely no doubt
in my mind that the St George acquisition by Westpac was a huge mistake. It was
the beginning of the end. It was the tipping point. St George was an intensive
competitor, particularly in relation to small businesses....the four big banks
basically took out one significant threat to them overnight. 
Indeed, it has become apparent that whenever a 'smaller' bank or lending
institution has emerged as a potential competitor in the sector, it has
promptly been acquired by one of the major four banks.
For example, the Commonwealth Bank acquired West Australian bank,
Bankwest, in 2008 for $2.1 billion, making the Commonwealth Bank the clear
market leader in that state.
The BankWest deal gave the Commonwealth Bank $55 billion in loans, $37
billion in customer deposits and 148 branches.
Although these banks continue to have their own branding and operate
individually at a retail front, there is a false sense of there being more competition
than really exists at a consumer level, given that the umbrella owners are in
fact one and the same.
The ability for banks to acquire emerging threats to their dominance
should therefore be prohibited through legislative amendment to Competition and
Consumer Act 2010. Similarly, Australia's 'four pillar' policy should never be
Unfortunately, mutuals, credit unions and smaller banks have struggled to
effectively compete against the major four banks, and the global financial
crisis and the Government's Wholesale Funding Guarantee Scheme, while necessary
and beneficial in some regards, only compounded the market domination of the
big four banks.
During the global financial crisis, the Australian Government guaranteed
Australian Deposit-Taking Institutions (ADIs) with credit ratings of AAA to AA-
at 70 basis points per annum, while those with credit ratings of A+ to A- were
charged 100 basis points and others 150 basis points.
The double cost of this to smaller financial institutions compared to
the major banks made it relatively onerous for them to access the guarantee and
therefore more and more customers flocked to the major banks rather than
supporting smaller lenders.
Mr Degotardi—...during the GFC the largest banks
accessed a wholesale government guarantee that we were not able to access
because of the differential pricing on that guarantee. The cost for us
therefore was too expensive. And that did put us at a disadvantage.
Mr Lloyd—There are differences of guarantee and
differences in the price of guarantee, which has disproportionately benefited
the major banks.
Mr Minz—Entities in the Australian marketplace which
are regulated by the one entity, APRA, are subject to the same prudential
standards...I do not believe the 150 basis points that we were charged was
Mr Anderson—...if you equalise the cost arrangements in
respect of the wholesale funding guarantee, that is going to be a direct
advantage to those second-tier institutions, and they would have the capacity
to flow that through...it certainly would allow them to compete more actively on
The Committee's recommendation to reduce the guarantee permia to 70
basis points for all ADIs (Recommendation 12.1) is a positive measure and will
work to even out the imbalance that currently exists.
It is crucial that financial institutions which could be potential fifth
pillars in the banking sector be able to thrive and by making the guarantee
more affordable for smaller ADIs, they will be able to compete against the big
four and offer alternative banking choices to Australian consumers.
The Committee also heard that it was difficult for some of the smaller
banks and credit unions to attract small and medium business loan customers due
to the dominance of the major four banks.
CPA Australia told the Committee:
Second tier lenders (smaller banks and credit unions)
...without larger distribution networks and larger back office support...[are]
unlikely...[to] become a major source of competition in small business lending.
These second tier lenders should be better supported by the Government
to enable them to provide alternative choice for consumers and increase
competition in the small business market.
The Australian Office of Financial Management currently offers
Residential Mortgage-Backed Securities and a similar scheme to support small
business lending should be considered for second tier lenders only.
It was also put to the Committee that a distribution channel for smaller
lenders should be established (such as through Australia Post) which would
alleviate significant costs and provide better access to consumers across
A survey of Queensland businesses found that 45 per cent supported this
and this was also encouraged by CHOICE.
Mr Stace—Smaller banks need a hand up and that may
also be through access to a branch network including, for example, working with
Associate Professor Frank Zumbo suggested that the Productivity
Commission undertake a feasibility study into this proposal, and Australia Post
offering basic banking services and to review the overseas experience with
national postal services offering banking services.
‘At Treasury, we won't save you’
In March 2010, Aussie Home Loans received an in principle 'go ahead'
from the Australian Office of Financial Management that it would be able to
acquire Residential Mortgage-Backed Securities.
This would have enabled Aussie Home Loans to provide approximately $1
billion in mortgages to its customers at interest rates below that of the
However, on 3 December 2010, just days before the Treasurer, the Hon
Wayne Swan MP, was due to announce the Government's banking reform agenda,
Aussie Home Loans received an email stating that:
"...contrary to previous advice, the AOFM is not going to
be in a position to support the transaction, based on CBA's ownership of AHL.
the Treasurer has clarified his expectation that the RMBS
program not support the major banks, or their subsidiaries (whether fully or
partially owned); and
in light of this clarification, the AOFM will not be in a
position to support the AHL transaction at this time."
As a result of this decision, Mr Symond told the Committee Aussie Home
Loan customers could face a 0.1 per cent increase, which would add about $350 a
year to a $500,000 home loan.
However, Aussie Home Loans is not a subsidiary of the Commonwealth Bank.
In universally-accepted business terms, a 'subsidiary' is understood to be an
entity that is controlled by a higher entity or parent company which owns more
than 50 percent of the company.
Only 33 percent of Aussie Home Loans’ shares are owned by the
Commonwealth Bank and although it holds 2 seats on the Board, Mr Symond has
repeatedly stated that Aussie Home Loans maintains operational independence
Ultimately, Australia's banking sector should comprise of as many
players where possible, to provide consumers with greater choice and thereby
creating more competition between the financial corporations.
Financial institutions which can be an effective alternative to the
major four banks need to be supported and the Government has significantly
erred in this area by choosing not to support Aussie Home Loans which would
have seen it provide competition to the mortgage sector.
Aussie Home Loans is 'market maker' in that it has been the impetus for
competition in the home loan market ever since it was established in 1992, providing
an alternative to the big four banks and spurring competition in the sector
thereby saving Australian consumers hundreds of millions of dollars.
The Treasurer's decision not to provide Aussie Home Loans access to the
RMBS program will have the paradoxical effect of reducing competition in the
mortgage market with negative consequences for consumers, despite the fact that
the Government's banking reform package is intended to "empower consumers
to get a better deal in the banking system, to support our smaller lenders so
they can put more competitive pressure on the big banks".
The Committee’s recommendation that the Australian Office of Financial
Management be able to exercise its discretion to purchase residential
mortgage-backed securities issued by entities with a substantial bank
shareholding where it judges this would promote a more competitive market
(Recommendation 13.5) is logical and should have been applied by the AOFM and
the Treasurer in the case of Aussie Home Loans. It was a missed opportunity.
banks be required to publish on their websites specific reasons for increasing
or decreasing their standard home loan rates each month, and any time delay between
the RBA’s decisions and the banks’ change in rates be disclosed and explanation
given, especially where the RBA has lowered the cash rate and the bank has not
the Competition and Consumer Act 2010 be amended so that the big four banks be
prohibited from acquiring any further second tier financial institutions.
the Productivity Commission conduct a feasibility study into Australia Post
becoming a distribution channel for smaller banks, credit unions and mutuals.
the Government introduce a scheme through the AOFM to assist second tier
lenders only to facilitate small and medium business loans.
Independent Senator for South Australia
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