REGIONAL BANKS - Suncorp Group
Transcript of REGIONAL BANKS - Suncorp Group
1 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
LEVELLING THE PLAYING FIELD IN RETAIL BANKINGSUBMISSION TO THE PRODUCTIVITY COMMISSION
REGIONAL BANKSSEPTEMBER 2017COMPETITION
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3 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
22 September 2017
Hello Peter
Regional Banks - Submission to the Productivity Commission We are pleased to provide this submission to the Productivity Commission’s Inquiry into Competition in the Australian Financial System. Our submission reflects the collective views of Australia’s regional banking sector, represented by Bendigo Bank, Bank of Queensland, Suncorp, AMP Bank and ME Bank.
This inquiry provides the right forum to develop reforms that will support a productive, competitive and sustainable banking sector in this country. Smaller banks bring vital competition and choice to the market, and drive innovation which ultimately produces better customer outcomes.
While the Financial System Inquiry (FSI) made a number of positive recommendations, which have improved the competitive neutrality of the banking sector, the playing field is still tilted in favour of the major banks and more needs to be done. Our submission highlights our assessment of five key structural failings that are stifling competitive neutrality, and fair and sustainable competition:
The artificial funding cost advantages which the major banks continue to enjoy, even after accounting for the introduction of the new Major Bank Levy;
The risk weight disparity that remains between the major banks (that use the internal ratings based approach to risk weighting) and smaller banks (that use the standardised approach to risk weighting), which is particularly pronounced in the case of low risk lending;
Macroprudential rules which have effectively ‘locked-in’ market share at current levels, leaving smaller banks no room to challenge the already dominant position of major banks;
Limited transparency and disclosure around mortgage aggregators which limits the capacity for consumers to make informed decisions; and
The unprecedented pace and volume of new regulation and compliance which is having a disproportionate impact on smaller banks.
As you will see, we have made five recommendations for addressing these structural failings. The underlying premise of our submission is to align the needs of consumers, the community, and shareholders, and make recommendations that are based on realistic and sound policy principles that seek to level the playing field and to
Mr Peter Harris AO Chairman Productivity Commission e-mail: [email protected]
2
ensure competitive tension, while preserving the stability of the system. Reforms in these areas will help support a sustainable, competitive and diverse banking sector in Australia, which will undoubtedly deliver better outcomes for customers.
We are also strongly supportive of the ABA’s calls for closer scrutiny of the shadow banking sector, which continues to compete free of many regulations and APRA oversight. We believe this issue is fundamental to ensuring all market players are able to compete more fairly.
We look forward to working with the Productivity Commission to further explore the issues raised in this submission.
[Signoff]
Sally Bruce Group Executive AMP
Mike Hirst Managing Director Bendigo Bank
Jon Sutton MD & CEO BOQ
Jamie McPhee CEO ME Bank
David Carter CEO, Banking and Wealth Suncorp
22 September 2017
Hello Peter
Regional Banks - Submission to the Productivity Commission We are pleased to provide this submission to the Productivity Commission’s Inquiry into Competition in the Australian Financial System. Our submission reflects the collective views of Australia’s regional banking sector, represented by Bendigo Bank, Bank of Queensland, Suncorp, AMP Bank and ME Bank.
This inquiry provides the right forum to develop reforms that will support a productive, competitive and sustainable banking sector in this country. Smaller banks bring vital competition and choice to the market, and drive innovation which ultimately produces better customer outcomes.
While the Financial System Inquiry (FSI) made a number of positive recommendations, which have improved the competitive neutrality of the banking sector, the playing field is still tilted in favour of the major banks and more needs to be done. Our submission highlights our assessment of five key structural failings that are stifling competitive neutrality, and fair and sustainable competition:
The artificial funding cost advantages which the major banks continue to enjoy, even after accounting for the introduction of the new Major Bank Levy;
The risk weight disparity that remains between the major banks (that use the internal ratings based approach to risk weighting) and smaller banks (that use the standardised approach to risk weighting), which is particularly pronounced in the case of low risk lending;
Macroprudential rules which have effectively ‘locked-in’ market share at current levels, leaving smaller banks no room to challenge the already dominant position of major banks;
Limited transparency and disclosure around mortgage aggregators which limits the capacity for consumers to make informed decisions; and
The unprecedented pace and volume of new regulation and compliance which is having a disproportionate impact on smaller banks.
As you will see, we have made five recommendations for addressing these structural failings. The underlying premise of our submission is to align the needs of consumers, the community, and shareholders, and make recommendations that are based on realistic and sound policy principles that seek to level the playing field and to
Mr Peter Harris AO Chairman Productivity Commission e-mail: [email protected]
22 September 2017
Hello Peter
Regional Banks - Submission to the Productivity Commission We are pleased to provide this submission to the Productivity Commission’s Inquiry into Competition in the Australian Financial System. Our submission reflects the collective views of Australia’s regional banking sector, represented by Bendigo Bank, Bank of Queensland, Suncorp, AMP Bank and ME Bank.
This inquiry provides the right forum to develop reforms that will support a productive, competitive and sustainable banking sector in this country. Smaller banks bring vital competition and choice to the market, and drive innovation which ultimately produces better customer outcomes.
While the Financial System Inquiry (FSI) made a number of positive recommendations, which have improved the competitive neutrality of the banking sector, the playing field is still tilted in favour of the major banks and more needs to be done. Our submission highlights our assessment of five key structural failings that are stifling competitive neutrality, and fair and sustainable competition:
The artificial funding cost advantages which the major banks continue to enjoy, even after accounting for the introduction of the new Major Bank Levy;
The risk weight disparity that remains between the major banks (that use the internal ratings based approach to risk weighting) and smaller banks (that use the standardised approach to risk weighting), which is particularly pronounced in the case of low risk lending;
Macroprudential rules which have effectively ‘locked-in’ market share at current levels, leaving smaller banks no room to challenge the already dominant position of major banks;
Limited transparency and disclosure around mortgage aggregators which limits the capacity for consumers to make informed decisions; and
The unprecedented pace and volume of new regulation and compliance which is having a disproportionate impact on smaller banks.
As you will see, we have made five recommendations for addressing these structural failings. The underlying premise of our submission is to align the needs of consumers, the community, and shareholders, and make recommendations that are based on realistic and sound policy principles that seek to level the playing field and to
Mr Peter Harris AO Chairman Productivity Commission e-mail: [email protected]
2
ensure competitive tension, while preserving the stability of the system. Reforms in these areas will help support a sustainable, competitive and diverse banking sector in Australia, which will undoubtedly deliver better outcomes for customers.
We are also strongly supportive of the ABA’s calls for closer scrutiny of the shadow banking sector, which continues to compete free of many regulations and APRA oversight. We believe this issue is fundamental to ensuring all market players are able to compete more fairly.
We look forward to working with the Productivity Commission to further explore the issues raised in this submission.
[Signoff]
Sally Bruce Group Executive AMP
Mike Hirst Managing Director Bendigo Bank
Jon Sutton MD & CEO BOQ
Jamie McPhee CEO ME Bank
David Carter CEO, Banking and Wealth Suncorp
22 September 2017
Hello Peter
Regional Banks - Submission to the Productivity Commission We are pleased to provide this submission to the Productivity Commission’s Inquiry into Competition in the Australian Financial System. Our submission reflects the collective views of Australia’s regional banking sector, represented by Bendigo Bank, Bank of Queensland, Suncorp, AMP Bank and ME Bank.
This inquiry provides the right forum to develop reforms that will support a productive, competitive and sustainable banking sector in this country. Smaller banks bring vital competition and choice to the market, and drive innovation which ultimately produces better customer outcomes.
While the Financial System Inquiry (FSI) made a number of positive recommendations, which have improved the competitive neutrality of the banking sector, the playing field is still tilted in favour of the major banks and more needs to be done. Our submission highlights our assessment of five key structural failings that are stifling competitive neutrality, and fair and sustainable competition:
The artificial funding cost advantages which the major banks continue to enjoy, even after accounting for the introduction of the new Major Bank Levy;
The risk weight disparity that remains between the major banks (that use the internal ratings based approach to risk weighting) and smaller banks (that use the standardised approach to risk weighting), which is particularly pronounced in the case of low risk lending;
Macroprudential rules which have effectively ‘locked-in’ market share at current levels, leaving smaller banks no room to challenge the already dominant position of major banks;
Limited transparency and disclosure around mortgage aggregators which limits the capacity for consumers to make informed decisions; and
The unprecedented pace and volume of new regulation and compliance which is having a disproportionate impact on smaller banks.
As you will see, we have made five recommendations for addressing these structural failings. The underlying premise of our submission is to align the needs of consumers, the community, and shareholders, and make recommendations that are based on realistic and sound policy principles that seek to level the playing field and to
Mr Peter Harris AO Chairman Productivity Commission e-mail: [email protected]
Dear Mr Harris
CONTENTSCONTENTS 4EXECUTIVE SUMMARY 5LIST OF RECOMMENDATIONS 7INTRODUCTION 81 CONTEXT 91.1 Historical overview 91.2 Summary of Murray Report Key recommendations 161.3 Reflectiononpressures/conditionsleadingtoGovernmentcallingforPCinquiry 181.4 Observations/reflectionsontermsofreference 192 COMPETITION 212.1 Definition,marketstructure,newentrants 212.2 What constitutes sustainable competition 222.3 Efficiencyandcapitalformation 232.4 Competitiveneutrality(barriers/issues) 252.5 Marketpowerandcustomer/consumerchoice/sovereignty 252.6 Innovation/technology 262.7 Regionalbankconclusiononcompetition 263 DATA: MARKET SHARE, PROFITS, MARGINS 273.1 Marketshare/trendanalysis 273.2 International comparison 323.3 Bank/non-bankmarketshare 333.4 Marketsharebysegment/product 343.5 Domestic/globaltrends 353.6 Domesticmarkets:Herfindahl–HirschmanIndexestimates 393.7 Fundingcostsandmargins 404 INDIVIDUAL REGIONAL BANK BUSINESS MODEL/S 484.1 Regionalbanksandconnectiontocustomer/community/diversity 484.2 Alignmenttocustomerinterest 524.3 Regionalbankssetthe“competitivefrontier”whilemajorsachievehigherROE’s 524.4 Growingbutcrowdedoutbyregulatoryarbitrage 525 KEY POLICY ISSUES/RECOMMENDATIONS 535.1 TBTF/Levy 535.2 Possiblelevydesignchanges 555.3 Capital/RWA 575.4 Macroprudentialcomplexity 625.5 Broker(verticalintegration) 635.6 Regulatoryburden 64CONCLUSION 65REFERENCES 66APPENDIX 1: Terms of Reference 68
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EXECUTIVE SUMMARYAustralia’sfinancialservicessystemistheenvyofthedevelopedworld.Ourbankscontinuetobethebackboneofournationaleconomy,whichhasgrownfor27consecutiveyears,defyinginternationaltrends,drivingstrongemploymentandultimatelyimprovingthestandardoflivingforAustralians.AkeyingredientofAustralia’seconomicsuccesshasbeentheresilienceandstrengthofourbankingsectorwhichhaswithstoodmarketshocksanddisruption,particularlytheGlobalFinancialCrisis.However,regionalbanksbelievetheeconomyisbeingheldbackandAustralianconsumersaresubstantiallydisadvantagedbycharacteristicsofthecurrentsystem,whichareinhibitinginnovationandfaircompetitionandcreatinganunevenplayingfield.ThehighlyconcentratedAustralianbankingsystemhasdevelopedasaby-productofapolicyorthodoxythathaslargelyfavouredstabilityovercompetitionandconsumerchoice.Regionalbanksstronglycontendthatthesystemcanhaveanappropriatelevelofstabilityand,atthesametime,allowforfaircompetitioninordertoachievebalancedoutcomes.Thisisultimatelyinthe best interests of consumers and the economy. Theonlysustainablecompetitivemodelisonewhichensurescompetitiveneutrality.Thatis,asysteminwhichtherulesareneutraltothesizeandcomplexityofamarketplayer.Withalevelplayingfield,thesuccessofindividualplayerswoulddependupontheextentandqualityoftheirservicetocustomers.Incontrast,itisarguablethatthecurrentlackofcompetitiveneutralityallowssomeinstitutionstoleveragescaleadvantagesdespiterecentdemonstrableflawsin consumer outcomes.Regionalbankscompetefiercelyformarketshare,butareconstrainedinrespecttosomeproductsandservicesandthisimpactstheeasewithwhichcustomerscanswitchbetweenfinancialinstitutions.Regulatorypolicysettingshaveallowedthebankingsectortobecomeincreasinglyconcentrated,andthishashadconsequencesforcustomersandtheeconomyingeneral.Overthefiveyearsto2016,Australia’sfourmajorbankswereclosetothemostprofitableintheworld.Dependingonthedefinitionofthemarket,theyholdupto85%marketshareoftotalassetsheldbydeposit-takinginstitutions,upfrom75%just10yearsago.Infact,since2007,themajorbankshaveimprovedtheirpositioninallproductmarkets:
• Shareoftotaldomesticresidentassetshasgrownfrom64%to79%;• Totaldeposits,61%to77.3%;• Householddeposits,68%to80%;• Businessdeposits,70%to78%;• Householdcreditcards,80%to82%;• Housinginvestmentloans,77%to85%;and• Housingowner-occupied,75%to81%.
Duringapproximatelythesametime,thenumberofAuthorisedDeposit-takingInstitutions(ADIs)inAustraliahasmorethanhalvedfromover200to95.Regionalbankswillremainonthecompetitivefringewhilethemarketisdominatedbythecommercialdecisionsandthelargelyhomogenousbusinessmodelsofthebigfourbanks.WhiletheFinancialSystemInquiry(FSI)madeanumberofpositiverecommendations,whichhaveimprovedthecompetitiveneutralityofthebankingsector,theplayingfieldisstilltiltedinfavourofthemajorbanksandmoreneedstobedone.
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Inparticular,therearefivefundamentalareasthatrequirepolicyreformifwearetorealiseatrulycompetitivesectorandaddresswhatundoubtedlyremainsanunevenplayingfield.Theyare:
1. Further policy reform is needed to reduce the artificial funding cost advantages enjoyed by the major banks.WhiletherecentMajorBankLevyhasreducedthisadvantage,itonlyrecoupsasmallproportionoftheoverallcreditratingupliftenjoyedbythemajors,andfurtherreform should be considered.
2. Further reform of risk weights is needed, to address the significant gap that still exists between the capital requirements of the major banks and standardised banks. While there hasbeensomeriskweightnarrowingfollowingtheFSI,thegapremainssignificant,andisparticularlystarkforloanswiththelowestrisk.
3. APRA should engage with regional banks to design macroprudential rules that better balance macro outcomes such as stability, without undermining banking competition. One option would be for APRA to give greater policy weight to minimum capital requirements. MacroprudentialrulessetbyAPRAhaveeffectively‘locked-in’marketshareofloanbooksatcurrentlevels,leavingsmallerbankswithnoroomtochallengethealreadydominantpositionofmajorbanks.
4. Mortgage aggregators and brokers, owned by major banks should publicly report on the proportion of loans they direct to their owners.Whilewedonotsuggestthatmajorbanksshouldberestrictedfromowningbrokernetworks,wedobelievethatwherethisoccurs,itshouldbemanagedinanopenandtransparentwaytoensurecustomersareabletomakefullyinformed decisions.
5. Before any new regulations are introduced, greater consideration should be given to the impacts on smaller banks. Theunprecedentedpaceandvolumeofnewregulationandcompliancehasadisproportionateimpactonsmallerbankswhichstiflessustainablecompetition.
TheregionalbanksalsosupporttheABA’ssubmissiontotheProductivityCommissioncallingongreaterregulationfortheshadowbankingsector,whichwebelieveisfundamentaltoensuringallmarketplayersareabletocompetefairly.AstrongbankingsystemisgoodforallAustralians.Smallerbanksbringvitalcompetitionandchoicetothemarketanddriveinnovation,whichultimatelyproducesbettercustomeroutcomes.It is vital that competition in the sector not only be fair but productive and sustainable.Thebottom-linetestmustbe:whatisgoodforcustomersisgoodfortheeconomy.
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7 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
LIST OF RECOMMENDATIONS
Recommendation:A. RegionalBankssupporttheGovernment’slevyonthemajorbanksandMacquarieasameansofpartlyaddressingthe“toobigtofail”fundingadvantage.Asthelevyonlyrecoupsaproportionofthe“toobigtofail”fundingbenefit,furtherpolicyinterventionstoreducethebenefitshouldbeconsidered. 56
Recommendation:B. Regionalbanksadvocatefurtherreformofrisk-weightsettingasperthesetofkeyprinciples. 61
Recommendation:C. APRAshouldengagewithregionalbankstodesignmacroprudential rules that better balance macro outcomes and bankingcompetition,andconsidergreaterpolicyweightbeinggiventominimumcapitalrequirements. 62
Recommendation:D. Mortgageaggregatorsandbrokersownedbymajorbanksshouldpublicly(andregularly)reportontheproportionofloansthey direct to their owners. 63
Recommendation:E. Thatbeforeanynewregulationsareintroduced,greaterconsiderationshouldbegiventotheimpactsonsmallerbanks. 64
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8 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
INTRODUCTIONThissubmissionhasbeenpreparedbyBendigoandAdelaideBank,BankofQueensland(BOQ),MEBank,SuncorpBank,andAMPBank.Thefivebankscollectivelyrepresenttheperspectiveof‘regionalbanks’.TheneedforaregionalbanksubmissionstemsfromthedesireoftheseinstitutionstomakeapolicycontributionwiththeaimofensuringahealthyandsustainablefutureforAustralia’sfinancialsystem,withaparticularfocusonthebankingsector.Acompetitive,multi-tieredbankingsectoristhebestmodeltoguaranteeAustralianconsumersandbusinesseswillbeabletoaccessinnovativeandbettervaluefinancialproductsandservicesintothefuture.Amulti-tieredbankingsysteminwhicheachtierbringsadifferentperspectiveandvigorouslycompetesforcustomers,onalevelplayingfield,willensureconsumerbenefitsareprotectedandenhanced.TheregionalbankingsectorhasconsistentlydeliveredabetterserviceforallAustraliansasreflectedbysuperiorcustomersatisfactionandtrustratings.Theregionalbanksbringessentialcompetitivetensiontothemarketthroughanextensiveandcompleterangeofqualityproductsandservicesforconsumers,businessesandregionalcommunities.Regionalbanksprovidegenuineandcrediblechoiceforcustomersandthereisaclearlinkbetweenthebanks’performanceandgoodcustomer outcomes.RegionalbanksviewthislinkascriticalforAustralianconsumersandthelong-termcontributionofthebankingsystem.Ensuringgenuinecompetitiveneutralityiskeytothisoutcome.TheregionalbanksbelievetheprimaryaimofthisCompetitionInquiryistoensuretheend-usersoffinancialproductsarethecentralfocus.Bankingsystemdesignmustidentifywhatisbestforthemumsanddads,businessesandeverydayAustralianswhorelyonsafe,efficientandinnovativeservices:tosavemoney,purchaseahouse,startabusinessandcarryoutalltheothertransactionsthatpeopleneedabankingsystemtodo.Thebankingsystemhasservedthemarketovertime.Whileothersectorsofthefinancialsystem,suchassuperannuationfunds,mayplayanincreasedroleintheprovisionofcapitaltotheeconomyinthefuture,thebankingsystemwillcontinuetoplayasignificantandcriticalroleintheintermediationofcapitalandprovisionofefficientpaymentsystems.Regionalbankswillalsocontinuetocontributetothisprocessbyprovidingcompetitivetensioninthedeliveryofqualityproductsandservicestoconsumers,smallbusinessesandregionalcommunities.TheGlobalFinancialCrisis(GFC)isthemainbackdroptotheProductivityCommission’s(PC’s)CompetitionInquiry.Thecrisisisapivotaleventintheeconomicandsocialhistoryofmanycountries.WhiletheAustralianeconomyandfinancialsystemprovedrelativelyrobust,theGFChasledtosignificantchangestothemotivationsandactionsofconsumers,businesses,financialinstitutionsandGovernment.Inturn,thesehavere-shapedmuchofthecompetitiveandregulatorylandscape.UpuntiltheGFC,arelativelylevelplayingfieldexistedforlargebanks,regionalbanks,foreign-ownedbanks,creditunions,buildingsocietiesandnon-ADIs.
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1 CONTEXT1.1 HISTORICAL OVERVIEWThefinancialsectorhasgrownconsistentlysincethe1970s.WhereastraditionallymanufacturinghasbeenAustralia’slargestindustry(asassessedbygrossvalueadded),financialserviceshasemergedasAustralia’smostimportantindustry.Grossvalue-added(GVA)measurestheextenttowhichanindustryusestheresourcesoflabourandcapital.Itisequivalenttothedollarvalueofthecostofwages,profitsandtaxation.Manufacturinghasdeclinedsteadilysincethe1970sascanbeseeninFigureA. This chart traces howthedeclineofmanufacturingisreplacedbytheincreasingimportanceofthefinancialsector.Financehasincreasedinrelativesizefrom4.28%oftotalGVAtothatofnearly9%today.
FIGUREA
GROSS VALUE ADDED%ofGDP
Source:UnderlyingdatafromABS.CalculationsandvisualisationbyBenchmarkAnalytics.
8.80%
5.98%
14.10%
4.28%
0.10
1977
Value
Financial and insurance serviceManufacturing
0.05
0.00
1982
Year to Date
1987 1992 1997 2002 2007 2012 2017
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In1987,thefinancialservicessectorwasthesixthlargestindustrybehindconstruction,manufacturing,publicadministration,andpubliceducation.WhentheGFChitin2007,financialserviceshadgrowntobeAustralia’ssecondlargestindustry.Onmostrecentannualdata(2016),thefinancialsectorstandsasthelargestindustrybygrossvalueadded(seeFigureB).
FIGUREB
INDUSTRY GROSS VALUE ADDED$m,rankedinyear2016
Source:UnderlyingdatafromABS.CalculationsandvisualisationbyBenchmarkAnalytics.
Financial and insurance services
Construction
Mining
Health care and social assistance
Professional,scientificandtechnicalservices
Manufacturing
Publicadministrationandsafety
Educationandtraining
Transport,postalandwarehousing
Retail trade
Wholesale trade
Rental,hiringandrealestateservices
Information media and telecommunications
Administrative and support services
Electricity,gas,waterandwasteservices
Accommodation and food services
Agriculture,forestryandfishing
Other services
Arts and recreation services
37,445
40,744
26,986
32,473
27,545
77,059
42,132
40,276
30,456
26,567
25,234
17,274
9,549
17,399
25,888
17,240
19,050
14,382
5,366
109,291
97,306
66,643
75,447
75,758
109,332
70,522
65,113
65,903
57,924
53,955
33,608
35,784
44,355
38,385
35,949
29,126
25,410
10,864
146,179
134,182
114,896
112,317
103,568
99,439
90,758
78,463
78,308
72,050
66,477
49,831
46,916
44,927
42,832
39,019
36,650
29,852
13,,606
1987 2007 2016Date
0K50K100K150K200K0K50K100K150K200K0K50K100K150K200K
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Thegrowthinthefinancialsectorhasemergedinaderegulatoryenvironment.Whilethefinancialsectorhasalwaysbeenregulatedtosomedegree,particularlydepositorsafetyanddisclosure,theprevailingpolicyorthodoxysincethelate1970shasbeentoregulatetheindustrythroughfosteringcompetition.ThisorthodoxyisevidentintherecommendationsofthethreemajorfinancialsectorinquiriesheldinAustraliasincethe1970s.The1979CampbellInquiryrecommendedthefloatingofthedollar,andthederegulationofthebankingsector,includingthegrantingoflicencesforforeignbanks.The1997WallisInquirysimilarlyputapolicyemphasisoncompetition.Toimprovecompetitiveneutrality,itrecommendeda‘twinpeaks’regulatorymodelaimedatremovingregulatorydistortions.Underthismodel,regulatoryobjectivesarealignedwithidentifiedpotentialmarketfailures,andtheintensityofregulationistailoredtothedegreeofriskinvolved.Inthewakeofforeignbankentryinthe1980s,aperiodofintensecompetitionforcommercialpropertyloansledtounsustainablepriceincreasesand,ultimately,wasamajorfactorinthedeeprecessionoftheearly1990s.Backthen,theoverextensionofcommercialpropertylendingbyWestpacandANZledtosignificantfinanciallosses.SomeGovernment-ownedstatebanksalsocollapsed.Thisdisturbancecameagainstaperiodoffinancialstabilitythroughthe1950s,1960sand1970s.Hence,somecommentatorssawderegulationasacontributingfactortothefinancialdifficultiesofthelate1980sandearly1990s.Morerecently,thebankingsectorhasbeencriticisedfortheriseinhouseholddebt,particularlythatusedtopurchasehousing.Credittohouseholdsisnowveryhighbyhistoricalandinternationalstandards.
11 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
12 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
ThisisseeninFigureC.Itshowscountriessplitbytotalhouseholdcredit(debt)relativetothecountry’sannualgrossdomesticproduct(GDP).Thedataonlyliststhetop25countries.
Asshownbythehighlightedbar,asofDecember2016,Australiahasthesecondhighesthouseholddebt levels in the world.
FIGUREC
HOUSEHOLD CREDIT OUTSTANDING%ofGDP,asat31/12/2016,top25countries
Source:UnderlyingdatafromBIS.CalculationsandvisualisationbyBenchmarkAnalytics.
128.40SWITZERLAND
AUSTRALIA
DENMARK
NETHERLANDS
NORWAY
CANADA
NEWZEALAND
KOREA
UNITEDKINGDOM
SWEDEN
UNITEDSTATES
PORTUGAL
HONGKONGSAR
SPAIN
JAPAN
SINGAPORE
GREECE
BELGUIM
EURO AREA
LUXEMBOURG
FRANCE
IRELAND
AUSTRIA
ITALY
ISRAEL
123.10
120.00
109.60
101.60
101.00
94.00
92.80
87.60
85.70
79.50
72.80
67.70
64.40
62.50
61.00
60.30
59.40
58.60
57.40
57.40
54.20
51.60
41.10
41.20
0102030405060708090100110120130140
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Asexpected,withlargevolumesofcreditdirectedtowardshousingandconstraintsinhousingapprovalandconstruction,housepricesinAustraliahavegrownsubstantially.Sincetheyear2000,residentialpropertypriceshaveincreasedbyanaverageof237%throughoutAustralia.Thisishighbyinternationalstandards,butitisnoteworthythatothercountrieshavealsoexperiencedhighresidentialpropertypricegrowth,seeFigureD.
FIGURED
RESIDENTIAL PROPERTY PRICES%growthbetween2000and2016,averaged
Source:UnderlyingdatafromBIS.CalculationsandvisualisationbyBenchmarkAnalytics.Indexesareaveragedacrossavailabledataseries.Onlyseriesthathavedatain2000and2016areincludedintheaveragedmethodology.
346.0%LITHUANIA
FINLAND
COLUMBIA
NEWZEALAND
HONGKONGSAR
AUSTRALIA
PERU
NORWAY
SWEDEN
FRANCE
MALAYSIA
BELGIUM
MALTA
DENMARK
AUSTRIA
SPAIN
SWITZERLAND
UNITEDSTATES
EURO AREA
NETHERLANDS
SINGAPORE
ITALY
GERMANY
GREECE
315.1%
238.6%
216.2%
237.4%
217.6%
194.1%
192.0%
158.1%
148.5%
133.6%
136.7%
92.7%
77.8%
76.6%
73.4%
71.4%
59.5%
56.5%
38.7%
39.4%
31.6%
11.7%
0%50%100%150%200%250%300%350%
2016
346.2%
14 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Forsometime,analystshavepredictedthatthislevelofhouseholddebtandhousepricesareunsustainableandripeforacorrection,intheorderofpricedeclinesof25%.Sofar,thishasnotmaterialised.OnepositivefactoristheunderlyingstrengthoftheAustralia’seconomywhichhasnotexperiencedarecessionformorethan25years.
Notwithstanding,thelevelofhouseholddebtandhousepricesremainsarisktotheeconomy.Itmakestheeconomymorevulnerabletoanexternalshockasanyincreaseinunemployment,oralossofconfidencewouldresultinhouseholdsaggressivelycuttingtheirconsumptionexpenditure.Householdconsumptioncurrentlyaccountsforaround60%ofGDP1.
Highhousepricesalsomakeitdifficultforyoungpeopletosaveanadequatedeposittobuyahouse,particularlywhenpermanentworkislessavailable,andthereislesssecurityinmostemployment.Wagegrowthhasalsobeensluggishsince2007astheimpactsofglobalisationandtechnologyhavereducedthebargainingpowerofworkersinnearlyallprivatesectorindustries.
Onesignificantfactordrivinghouseholddebtandhousepricessincetheearly1990shasbeentheincreaseinlendingintotheAustralianhouseholdsectorattheexpenseofbusinesslending2. This changeinbusinessstrategywasdrivenbyaneconomicallyrationalviewthatsuperiorrisk-adjustedreturnswereavailablethroughfundingmortgagesonresidentialproperty.Thisviewwasvindicatedwith the introduction of Basel II and advanced accreditation.
1ABSAustralianNationalAccount,June2017,Cat.No.5206.02Thischangeinstrategyisevidentfromtheincreasingshareofmortgageassetsasaproportionoftotalassets.TheRBAwebsitehasbalancesheetdataonanindividualbankbasisgoingbackto1991,andAPRA’smonthlybankingstatisticsincludesbalancesheetdatafromJune2004.
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15 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
FIGUREE:PERSPECTIVESONCOMPETITION
COMPETITION COMPETITIVE NEUTRALITY
1979 Financial System Inquiry (Campbell)
TheCommitteestartedfromtheviewthatthemostefficientwaytoorganiseeconomicactivityisthroughacompetitivemarketsystemwhichissubjecttominimumregulationandgovernmentintervention.(p1)
…the principle is clear –investorprotectionarrangements,includingReserveBankliquiditysupportarrangements,shouldaimto involve the minimum disturbance to competitive neutrality.(p.289)
1997 Financial System Inquiry (Wallis)
Theefficiencyofthefinancialsystemaffectsevery business and individual in the nation. Thereareverylargeefficiencygainsandcostsavingswhichcouldbereleasedfromtheexistingsystem…Marketscanonlydelivertheseoutcomes where competition is allowed to thrive andwhereconsumershaveconfidenceintheintegrityandsafetyofthesystem.(p.2)
TheprinciplesofregulationwhichhaveguidedtheInquiryarecompetitiveneutrality,costeffectiveness,transparency,flexibilityandaccountability(p.176)…Competitiveneutralityrequiresthattheregulatoryburdenapplyingtoaparticularfinancialcommitmentorpromiseapplyequallytoallwhomakesuchcommitments.(p.196)
2014 Financial System Inquiry (Murray)3
CompetitionandcompetitivemarketsareattheheartoftheInquiry’sphilosophyforthefinancialsystem.TheInquiryseesthemastheprimarymeansofsupportingthesystem’sefficiency.AlthoughtheInquiryconsiderscompetitionisgenerallyadequate,thehighconcentrationandincreasingverticalintegrationinsomepartsoftheAustralianfinancialsystemhasthepotentialtolimitthebenefitsofcompetitioninthefutureand should be proactively monitored over time.(p.xvi)
TheInquiryconsidersthatabsentotherpolicyobjectives,competitive neutrality is an importantregulatoryprinciple.(p.61)
3InadditiontotheMurrayInquiry,atthesametimeProfessorIanHarpercompletedaCompetitionPolicyReviewwherehepresenteda‘forward-looking’packageofreformstoreinvigoratecompetitioninAustralia(Harper,Anderson,McCluskey,&O’Bryan,March2015).Whilethefinancialsectorwasnotexplicitlycoveredinhisreview,theemphasisoncompetitionwasconsistentwithMurrayReportfindings.
16 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Insummary,whilecompetitionhasbeentheprevailingorthodoxyinfinancialregulationsincethe1970s,somecommentatorshavequestioneditslegitimacy.Fromaregionalbankperspective,competitiondrivesoptimaloutcomesforconsumersandthewidereconomy..Webelievethatrecentflawedoutcomesforconsumersaretheresultofshort-comingsincompetition,particularlyinadequatecompetitiveneutrality.Anotherconsiderationistheissueofsustainablecompetition.Competitionlawhaslongprohibitedpracticeswhichmayappearconsumer-friendlyintheshort-term,buthaveadverselong-termimplications.Onesuchpracticeispricingundercost.Thiscandriveoutsuppliersandcausepricestobehigherthanotherwiseinthefuture.Thisriskisheightenedwhereonesupplierhasmarketpowerand,further,wherethatsupplierhasanunwarrantedcostadvantage,suchaslowerfundingcosts(asisthecasewithbanksthataretreatedbytheGovernmentas“toobigtofail”).
1.2 SUMMARY OF MURRAY REPORT KEY RECOMMENDATIONSThe2014FinancialSystemInquiry(FSI)wasakeyeventinthepost-GFCeraforAustralianbanks.TheInquirytooktworoundsofpublicsubmissions.Thefirstroundreceived280submissionsandthesecondround6,500submissions.Thelatterbeingdominatedbysubmissionsrelatingtocreditcardsurcharging.Thefinalreportmade44recommendationstoimprovetheefficiency,resilienceandfairnessofAustralia’sfinancialsystem.Italsoprovidedsetsofprinciplestoguidepolicysettingoveranextendedtimeframe,upto20years.Itmade13observationsrelevanttobroadertaxationpolicy.TheMurrayInquiry’sTermsofReference(TOR)requiredthereviewpaneltorecommendhowAustralia’sfinancialsystemcanbepositionedtosupporteconomicgrowthandmeettheneedsofendusers.TheyalsoconsiderhowthesystemhadchangedsincetheWallisInquiry,includingtheeffectsoftheGFC.(http://fsi.gov.au/2014/12/08/address-to-ceda/)RegionalbanksmadetwosubmissionstotheFSI.Themainrecommendationoftheregionalbankswastosecurechangestothesystemofsettingrisk-weightedassetsinAustraliagiventheunjustifieddichotomythatexistedbetween‘standardised’andIRBbanks.ThisissuewasaddressedbyDavidMurray in recommendation number 2.Recommendation2waspartiallyimplementedinJune2016.Itresultedinmajorbankshavingtomateriallyincreasecapitallevels,whichhasnotonlyimprovedcompetitionbutalsoincreasedoverallsystemresilience,consistentwithDavidMurray’srecommendationnumber1whichwasforthebankingsystemtohaveunquestionablystrongcapitallevels.
1.2.1 Murray recommendations and regional bank positionRegionalbankswerepleasedthattheMurrayInquiryhighlightedthatanunevenplayingfieldthathademergedasaresultofprudentialregulationandotherinitiativessuchasthedifferentialpricingoftheGovernmentGuaranteeduringtheGFC.Afterthefinalreportwasreleased,theregionalbanksassessedeachrecommendationasperthedetailssetoutinFigureF.Note–onlyrelevantrecommendations are listed in the table.
17 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
FIGUREF:MURRAY’SRECOMMENDATIONSANDREGIONALBANKPOSITION(ONLYRELEVANTRECOMMENDATIONSLISTED)
MURRAY REC
DETAILS REGIONAL BANK POSITION
1 CapitallevelsSetcapitalstandardssuchthatAustralianauthoriseddeposit-takinginstitutioncapitalratiosareunquestionablystrong.
Supported
2 NarrowmortgageriskweightdifferencesRaisetheaverageinternalratings-based(IRB)mortgageriskweighttonarrowthedifferencebetweenaveragemortgageriskweightsforauthoriseddeposit-takinginstitutionsusingIRBrisk-weightmodelsandthoseusingstandardisedriskweights.
Stronglysupported
3 LossabsorbingandrecapitalisationcapacityImplementaframeworkforminimumlossabsorbingandrecapitalisationcapacityinlinewithemerginginternationalpractice,sufficienttofacilitatetheorderlyresolutionofAustralianauthoriseddeposit-takinginstitutionsandminimisetaxpayersupport.
Supported
4 TransparentreportingDevelopareportingtemplateforAustralianauthoriseddeposit-takinginstitutioncapitalratiosthatistransparentagainsttheminimumBaselcapitalframework.
Supported
5 CrisismanagementtoolkitCompletetheexistingprocessesforstrengtheningcrisismanagementpowersthathavebeenonholdpendingtheoutcomeoftheInquiry.
Supported
6 FinancialClaimsSchemeMaintaintheex-postfundingstructureoftheFinancialClaimsSchemeforauthoriseddeposit-takinginstitutions.
Stronglysupported
7 LeverageratioIntroducealeverageratiothatactsasabackstoptoauthoriseddeposit-takinginstitutions’risk-weightedcapitalpositions.
Supported
15 DigitalidentityDevelopanationalstrategyforafederated-stylemodeloftrusteddigitalidentities.
Supported
19 Data access and useReviewthecostsandbenefitsofincreasingaccesstoandimprovingtheuseofdata,takingintoaccountcommunityconcernsabout appropriate privacy protections.
Neutral
20 ComprehensivecreditreportingSupportindustryeffortstoexpandcreditdatasharingunderthenewvoluntarycomprehensivecreditreportingregime.If,overtime,participationisinadequate,Governmentshouldconsiderlegislatingmandatoryparticipation.
Supported
18 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
MURRAY REC
DETAILS REGIONAL BANK POSITION
22 Introduce product intervention powerIntroduce a proactive product intervention power that would enhancetheregulatorytoolkitavailablewherethereisriskofsignificantconsumerdetriment.
Neutral
23 Facilitate innovative disclosureRemoveregulatoryimpedimentstoinnovativeproductdisclosureandcommunicationwithconsumers,andimprovethewayriskandfees are communicated to consumers.
Supported
24 AligntheinterestsoffinancialfirmsandconsumersBetteraligntheinterestsoffinancialfirmswiththoseofconsumersbyraisingindustrystandards,enhancingthepowertobanindividualsfrommanagementandensuringremunerationstructuresinlifeinsuranceandstockbrokingdonotaffectthequalityoffinancialadvice.
Neutral
25 Raise the competency of advisersRaisethecompetencyoffinancialadviceprovidersandintroduceanenhancedregisterofadvisers.
Supported
1.3 REFLECTION ON PRESSURES/CONDITIONS LEADING TO GOVERNMENT CALLING FOR PC INQUIRY TheGovernmentannouncedaPCInquiryintothebankingsystemaspartofits2017Budgetannouncement.ThespecificrecommendationwasinresponsetotheColemanCommitteerecommendationforacompetitioninquiry–seeFigureG.TheColemanInquirywasitselfareflectionoftheissuesdiscussedintheprevioussection.
FIGUREG:COLEMANRECOMMENDATIONONCOMPETITIONTHATWASACCEPTEDBYTHETURNBULLGOVERNMENT
Recommendation 3 The Government agrees with this recommendation.
The committee recommends that the Australian CompetitionandConsumerCommission(ACCC),ortheproposedAustralianCouncilforCompetitionPolicy,establishasmallteamtomakerecommendationstotheTreasurereverysixmonthstoimprovecompetitioninthebankingsector.If the relevant body does not have any recommendationsinagivenperiod,itshouldexplainwhyitbelievesthatnochangestocurrentpolicysettingsarerequired.
WehavetaskedtheProductivityCommissiontoundertakeareviewofcompetitioninthefinancialsystem,commencing1July2017.TocomplementtheProductivityCommissionreview,wewillprovidetheACCC$13.2millionoverfouryearstoestablishadedicatedunittoundertakeregularin-depthinquiriesintospecificfinancialsystemcompetitionissuesfrommid-2018.
19 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
1.4 OBSERVATIONS/REFLECTIONS ON TERMS OF REFERENCERegionalbanksstronglysupportthePCreviewofthefinancialsector.WeunderstandthatthisisthefirsttimethePChasbeentaskedtoexaminecompetitioninfinancialservices.
RegionalbanksacknowledgethatthePC,asanagency,hasafocuson‘efficiency’,andthisisappropriategiventhatultimatelythepurposeofpublicpolicyistoensureacountry’sresources,includingworkersandcapital,areusedinthemostefficientmeanspossible.
1.4.1 Regional bank high-level observations on TORIn FigureH,regionalbanksdetailreflectionsontheTORthatmaybeusefulfortheinquiryinunderstandingourperspective.
20 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
FIGUREH
PC TOR NO.
DETAILS REGIONAL BANK HIGH-LEVEL COMMENT
1 Considerthelevelofcontestabilityandconcentrationinsegmentsofthefinancialsystem(includingthedegreeofverticalandhorizontalintegration,andtherelatedbusinessmodelsofmajorfirms),anditsimplications for competition and consumer outcomes
Stronglyagreewithinquiringintocontestability and concentration. RegionalBanksnotetheprimaryissuewithverticalandhorizontalintegrationiswithbanksthathaveactualmarketpower.
2 Examinethedegreeandnatureofcompetition in the provision of personal depositaccountsandmortgagesforhouseholdsandofcreditandfinancialservices for small and medium sized enterprises
Support,creditforsmallbusinessisanissueforlong-termproductivity.Majorbankshavethebalancesheetsizeandriskmanagementcapabilitytodomoresmallbusinesslending.
3 ComparethecompetitivenessandproductivityofAustralia’sfinancialsystem,andconsequentconsumeroutcomes,withthat of comparable countries
Supported.Notethatefficiencycomparisonsmustrecognisedifferencesinbusinessmodels.Forexample,banksthatdoalotofcommerciallendingwillhavehighercoststhanbankswithlargecommoditisedbusinesseslikehousingloans or credit cards.
4 Examinebarrierstoandenablersofinnovationandcompetitioninthesystem,includingpolicyandregulation
Supported.Noteinnovationwillcomefromgenuinecompetitiveneutrality.
5 Prioritiseanypotentialpolicychangeswithreferencetoexistingpro-competitionpoliciestowhichtheGovernmentisalreadycommittedorconsideringinlightofotherinquiries.
Supported.Regionalbanksarekeentoensureregulatorychangesarekeptto the minimum needed to achieve the policyobjective.
Other TheCommissionshouldhaveregardtotheGovernment’sexistingwide-rangingfinancialsystemreformagendaanditsaimsto:• strengthentheresilienceofthefinancial
system• improvetheefficiencyofthe
superannuation system• stimulateinnovationinthefinancial
system• supportconsumersoffinancialproducts
beingtreatedfairly• strengthenregulatorcapabilitiesand
accountability.
Supported.RegionalbanksunderscoretheimportanceofensuringcompetitionisgivenappropriatepolicyweightgivenAustralia’slongrecordoffinancialsecurity.
21 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
2 COMPETITION2.1 DEFINITION, MARKET STRUCTURE, NEW ENTRANTS Competitionisaprocessofrivalrybetweenfirms,eachseekingtowinacustomer’sbusiness.Theprimaryobjectiveofcompetitionpolicyistopromoteefficiencywhichinturnboostsandstimulateseconomicgrowth.Accordingtothe1993independentcommitteeofinquiryintoNationalCompetitionPolicy(Hilmer,Rayner,&Taperell,1993):
Competition policy is not about the pursuit of competition per se. Rather, it seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives. (Hilmer, Rayner, & Taperell, 1993, p. xvi).
Formerchants,theretailpriceofaproducttheychargeisbroughtintosomerelationshipwithcostthroughthecompetitiveprocess(Adelman,1957,p.266).Asthe1997FinancialSystemInquiry(WallisReport)observed:
In markets where the degree of competition among suppliers is high, prices are likely to reflect the underlying cost of production. Suppliers pricing above this cost will be undercut by other suppliers, thereby losing market share. (Wallis, Beerworth, Carmichael, Harper, & Nicholls, 1997, p. 601)
Thus competition forces prices down towards the cost of production which enhances allocative efficiency.Competitionpromotesproductiveefficiencybyforcingfirmstocuttheircostsinordernottolosesalestomoreefficientrivals(Kolasky&Dick,2003,p.208). Iffirmscannotmaintainproductiveefficiencywiththeirrivals,theyrisklosingmarketshareandpossiblygoingoutofbusinessaltogether.Competitionalsoprovidesaspurfordynamicefficiency.Firmsundertakeinnovationthroughresearchanddevelopment(R&D)toimprovetheircompetitiveness.R&Dcanhelpabusinessloweritscostsofproductionand/orproducebetterproducts,givingitacompetitiveadvantageoveritsrivalsinthemarketplace.ThebenefitsfirmsseektocapturethroughR&D,namelylowercosts,higherproductivityandbetterproducts,ifrealised,willultimatelygeneratehigherratesofeconomicgrowth.Because of the demonstrated success of competitionindrivingeconomicefficiencyand,therefore,risinglivingstandards,Governmentsfrequentlychampionitsimportanceanduseitasaprimaryprincipletoguidedecision-making.ThecurrentFSIidentifiedcompetitionasa
keyobjectiveasdidthetwopreviousfinancialsysteminquiries.The1981AustralianFinancialSystemInquiry(Campbell,etal.,1981)andthe1997WallisReport (Wallis,Beerworth,Carmichael,Harper,&Nicholls,1997)placedconsiderableweighton the importance of competition as the most efficientmeansoforganisingfinancialactivity.Inadditiontothegeneralconceptofcompetition,they advocated the need to achieve competitive neutrality. These perspectives are summarised in therecommendationsofboththeCampbellandWallisreports,wheretheauthorsrecommendedpolicyinitiativestobringaboutgenuineimprovements in the competitive operation of markets.TheWallisReportledtothewholesalere-structuringoffinancialregulation,establishingadedicatedprudentialregulator,theAustralianPrudentialRegulationAuthority(APRA),andadedicatedregulatortosupervisemarketdisclosureandconduct,theAustralianSecuritiesandInvestmentsCommission(ASIC).Bothinquiriesalsorecommendedagainstallowingafinancialsystemtohaveintermediariesthatare“toobigtofail”.
22 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
2.2 WHAT CONSTITUTES SUSTAINABLE COMPETITIONRegionalbankshaveastrongpositionthattheonlysustainablecompetitivemodelisonewhichensurescompetitiveneutrality.Solongastheregulatorysettingsareneutraltosizeandcomplexity,thensuccesswilldependupontheextenttowhichcustomersaresatisfied.Atthecoreofregionalbanks’concernsisthestatusofmajorbanksasbeing“toobigtofail”.Thisdesignationbydefinitionviolatesthecompetitiveneutralityprinciple.
APRA’s December 2013 media release
InDecember2013,theAustralianPrudentialRegulatoryAuthority(APRA)issuedamediareleasedeclaringthattherewerefourbanksinAustraliaassessedasbeingdomesticallysystemicallyimportant(D-SIBs).Awidely-usedtermtodescribesystemicallyimportantinstitutionsis“toobigtofail”.APRA’sstatementconfirmedandcrystallisedwhathadbeenwellknownbutneverofficiallyrecognised,thatthelargestfourbankshadaspecialstatusinthatfailurewouldhavesevereeconomicimpacts.Ineffect,theyhadanimplicitsubsidyfromtaxpayers.RegionalbanksbelievethisAPRAmediareleasesymbolisesthecoreprobleminAustralianbanking,thatfourinstitutionshaveaspecialstatus,andthatthisgivesthematruecompetitiveadvantageoverbanksthatdonothavethisstatus.ThemostobviousmanifestationofthisbeingthedifferentialpricingoftheGovernmentGuaranteeduringtheGFC.
22 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
23 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
2.3 EFFICIENCY AND CAPITAL FORMATIONEfficiencyreferstotheoptimaluseofresources.Theissueofefficiencyiscomplexwhenconsideringfinancialservices.WeknowthatAustralia’sfinancialsectorisoneofthelargestintheworld,equatingtoaround9%oftotalgrossvalueadded.Inonerespect,thiscouldindicatewehaveaninefficientsystemgiventheamountofcapitalandlabour resources utilised in the process of intermediation and provision of payment facilities.Ontheotherhand,ourfinancialinstitutionsarerelativelyefficientregardingcost-to-incomeratios.Foreverydollarofincome,theoperatingcostsofAustralianbanksaresmallbyinternationalstandards,asperFigureI.Theefficiencyratiointhechartisdefinedastheoperatingcostsasaproportion of total income.
FIGUREI
EFFICIENCY RATIOSelectionofinternationalbanks
Source:DataprovidedbySuncorp.
88.70DZBANK
RABOBANK
ROYALBANKOFSCOTLANDGROUP
TORONTO-DOMINIONBANK
BANKOFMONTREAL
WELLSFARGO&CO
JPMORGANCHASE&CO
CITIBANKNA
BANCOSANTANDERSA
INGGROEPNV
DANSKE
NORDEABANKAB
AUSTANDNZBANKINGGROUP
NATIONALAUSTRALIABANKLTD
WESTPACBANKINGGROUP
COMMONWEALTHBANKOFAUSTRALIA
65.60
63.51
61.78
59.74
58.52
58.10
56.86
54.91
54.24
51.98
50.15
49.62
45.05
43.42
0102030405060708090100
Australian-majorbanksInternationalbanks
41.82
24 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Whencomparingfinancialinstitutionefficiencyratios,an‘applestoapples’comparisonrequiresanunderstandingofthevariousbusinessstructures.Australia’smajorbanksareveryunusualinthatthelargestcomponentoftheirassetsisresidentialmortgages.Bigbanksinmostcountrieshaveamuchhigherproportionofcommerciallending.Commerciallendingishighercostbecausetherisksassociatedwithbusinesslendingaretypicallymoreidiosyncraticandrequiremuchgreatercreditanalysisthandoesthehomogenisednatureofmortgagelending.Giventhis,itisnotsurprisingthatAustralia’smajorbanksarerelativelyefficientintermsofcost-to-income.However,thelargesizeofourfinancialsectormeansthat,asacountry,Australiaisspendingmoremoneyonfinancialservicesthanmostothercountries.Onefactoristhereturntoshareholders.Australia’smajorbanksarehighlyprofitable-seeFigureJforacomparisonofprofitmarginsacrossbankingsystems.Profitmarginisdefinedasthebeforetaxprofitdividedbytotalincome.
FIGUREJ
CautionisneededwhendrawingconclusionsabouttheefficiencyofthemajorbanksinAustralia.Thecost-to-incomeratioiscalculatedbytwovariables–incomeandcosts.Alowcosttoincomeratiowillresultifincomeishigh,costsarelow,oracombinationofboth.Bybenchmarkingcostsandincomeagainsttotalassetsandthencomparingthesebenchmarkstobanksinothercountries,theconclusionisthatAustralia’slargestbankshavelowercost-to-incomeratios due to balance sheet size and diversity. Whilecostsarenotespeciallyhighbyinternationalstandards,thiscanbepartiallyexplainedbythecommoditisednatureofmajorbank’sassets–withaheavyweightingtowardsresidentialmortgages.
PROFIT MARGINSelectionofinternationalbanks
Source:DataprovidedbySuncorp.
COMMONWEALTHBANKOFAUSTRALIA
WESTPACBANKINGGROUP
NATIONALAUSTRALIABANKLTD
DANSKE
NORDEABANKAB
AUSTANDNZBANKINGGROUP
INGGROEPNV
TORONTO-DOMINIONBANK
JPMORGANCHASE&CO
WELLSFARGO&CO
BANKOFMONTREAL
RABOBANK
CITIBANKNA
BANCOSANTANDERSA
ROYALBANKOFSCOTLANDGROUP
DZBANK
38.44
35.92
35.48
35.23
34.35
28.82
27.00
26.01
25.50
24.85
23.26
22.06
19.66
13.84
0510152025303540
Australian-majorbanksInternationalbanks8.39
5.58
25 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
2.4 COMPETITIVE NEUTRALITY (BARRIERS/ISSUES)Whilemarketconcentrationcanprovideguidanceastowhichmarketsarelikelytoraisecompetitionconcerns,otherfactorsalsowarrantconsideration.Theseotherfactorsincludetheheightofbarrierstoentryandtheextentofsunkcostsincurredbynewentrants.Aprominentindustrialorganisationeconomist(Bain,1956) considered the force of potential competitionasaregulatorofpriceandoutputisjustasimportantasactualcompetition.Bainfocussedontheheightofbarrierstoentryasthecriticaldeterminantofthepricelevel.AccordingtoBain,theextentofbarrierstoentryinanindustryindicatedtheadvantagethatexistingsellersenjoyedoverpotentialentrants.Anyentrycostthatisunrecoverableisasunkcost.Theneedtosinkcostsintoanewfirmimposesadifferencebetweentheincrementalcostandtheincrementalriskthatisfacedbyanewentrantandanincumbentfirm(Baumol&Willig,1981,p.418).Inthecaseofanincumbent,suchfundsarealreadyspent,andtheyareexposedtowhateverrisksthemarketentails.Incontrast,thenewfirmmustincuranyentrycostsonenteringthemarketthatincumbentsdon’tbear.Theentryofnewfirmsintoamarketcanprovidecompetitiveconstraintonincumbents(AustralianCompetitionandConsumerCommission,2008,p.38). If new entrants can offer customers an appropriatealternativesourceofsupplyattherighttime,anyattemptbyincumbentstoexercisemarketpowerwillbeunsustainablesincetheircustomerswillswitchtothenewentrants.Theexistenceofsunkcosts,whichincreasestherisksof,andcostsassociatedwith,failedentry,maydeternewentryaltogether.
2.5 MARKET POWER AND CUSTOMER/CONSUMER CHOICE /SOVEREIGNTYTheeconomicandlegalliteratureprovidesseveraldefinitionsofmarketpower.Acommonly-useddefinitionisthefollowing:“A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a business facing otherwise similar cost and demand conditions.” (Kaysen&Turner,1959,p.75) Anotherdefinitionofmarketpoweris“….the ability of a firm to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded” (Landes&Posner,1981,p.937) Anoligopolyisamarketstructurecharacterisedbyafewparticipants.Itmayincludea“competitive fringe” of numerous smaller sellers who behave competitively because each is too small individually to affect prices or output (Areeda,Solow,&Hovenkamp,2002,p.9) TheprovisionoffinancialservicesinAustralia–thatisdominatedbythefourlargebanks–couldbecharacterisedasanoligopolythatissupplementedbyacompetitivefringethatincludesregionalbanksandcustomer-ownedbanks(creditunionsandbuildingsocieties).
Committeechairman,DavidColeman:“Australia’s banking sector is an oligopoly. The major banks have significant market power that they use to protect shareholders from regulatory and market developments.” (House of Representatives Standing Committee on Economics, 2016)Treasurer,ScottMorrison:“…the banking system in Australia – with a small number of large and highly profitable banks at its core – is highly concentrated… The House of Representatives Economics Committee’s ‘Review of the Four Major Banks’, commissioned by the Government last year, concluded that Australia’s banking sector is an oligopoly and that Australia’s largest banks have significant pricing power which they have used to the detriment of everyday Australians. (Morrison, 2017)
26 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Sometheoriesofoligopolypredictthatoncefirmsrecognisetheirinterdependency,theirmostrational course of action would be to behave in a manner reminiscent of a monopoly. The outcome fromthesemodelshasbeendescribedastacitcollusion,alsoknownascoordinatedeffects.Whilefirmsarenotnecessarilypartofaformalcartelarrangement,thefirmscancoordinatetheirconductso that an outcome similar to cartel or monopoly is achieved.However,justbecauseamarketischaracterisedashavinganoligopolystructuredoesnotnecessarilymeanthatitwillbepronetocoordinatedeffectsandtheabuseofmarketpower.Identifyingfirmsthathavesubstantialmarketpowerenablesonetodistinguishbetweenconductthatmightharmconsumersandconductthatcannot.(Bork&Sidak,2013,p.511)Unfortunately,thereisnodefinitivetest.Instead,onemustrelyonaseriesofpartialindicatorstodeterminewhetherfirmsparticipatinginamarketareexercisingmarketpower.AccordingtocompetitionlawexpertRobertBorkandProfessorGregorySidakofTilburgUniversity(Bork&Sidak,2013,p.512): “Courts and competition authorities around the globe typically rely on indirect evidence of market power, such as market share and barriers to entry.”
2.6 INNOVATION/TECHNOLOGYInnovationhasthepotentialtotransformthebankingandfinancialsystem.Wehavealreadyseenconsiderabledevelopmentsinmobilebanking,cloudcomputinginternetdelivery,andpaymentservices.Contactlesspayments,forexample,arequicklydisplacingcash.AsfoundbytheMurrayInquiry,innovationhasthepotentialtodeliversignificantefficiencybenefitsandimproveoutcomesforconsumersandbusinessesgenerally,butitalsoraisesfinancialrisks.Financialinnovationcanundermineregulatoryobjectivesbyshiftingrisksoutsidetheregulatoryperimeter,theso-calledproblemassociatedwith‘ShadowBanks’.Regionalbankshaveaparticularconcernovermacroprudentialrulesplacinglimitsoninvestorlendingandhowtheunevenimplementationoftheserulesisshiftingcreditsupplyintothenon-regulatedspace.Bydoingso,competitiveneutralityisunderminedasisthemacro-objective.
2.7 REGIONAL BANK CONCLUSION ON COMPETITIONRegionalbankshavebeenaroundformorethan150yearsandcompetefiercelyformarketsharebutinsomemarketshavelimitedabilitytoinfluence/compete.Thishasconsequencesforcustomersandconsumersgenerally.Regionalbanksarethecompetitivefringe,butthemarketisverymuchcontrolledbythecommercialdecisionsofthelargestinstitutions,andthebusinessmodelsofthebigfourareverysimilar.Whenregionalbankexecutivesgivebriefingsafterresultsannouncements,itiscommonforthemtorefertomarketconditionsas‘verycompetitive’.Whatthisreallymeansisthattheproductmarkets,fromtheirownbusinessperspective,areverycompetitive.Onekeyreasontheyfinditcompetitiveisthattheplayingfieldistiltedagainstthemfor the reasons discussed above. Thedominantmarketpowerofasmallnumberofplayersisaconsequenceof;
• “Toobigtofail”drivingfundingadvantages;• Risk-weightcapitaldifferences;and• Insufficientdisclosurearoundtheownershipofnon-branchdistributionnetworksandthe
proportion of loans they direct to their owners.
27 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3 DATA: MARKET SHARE, PROFITS, MARGINS3.1 MARKET SHARE/TREND ANALYSISDependingonthedefinitionofmarket,themajorbanksinAustraliahaveupto85%marketshareoftotalassetsheldbydeposit-takinginstitutions.ThisisseeninFigureKbelowwhichshowsmarketshareusingAPRA’squarterlyperformancestatistics.Thesefiguresincludedataformajorbanks,regionalbanks,creditunions,buildingsocietiesandforeign-ownedsubsidiaries.Assetsofforeignbranchesareexcluded.Thisdatasetrepresentsconsolidatedassetsofallbankingbusinesses,includingAustralian-ownedforeignoperations.In2004,themajorbanksshareoftotalassetswas78%,butthemajorbanks’marketsharesteadilydeclinedtolessthan75%beforetheGFCcommencedin2007andsubsequentmergersofCBA/BankWestandWestpac/St.George.
FIGUREK
TOTAL ASSETS%Shareoftotal(domesticandosbooks)
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
21.49%
2008
MajorbanksOtherbanks
2013
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
15.07%
84.93%78.51%
28 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Themarketshareofmajorbanksintotalloansandadvancesmirrorsthatoftotalassets–see FigureL.Thisisnotsurprisingasloansandadvancesarethelargestcomponentsoftotalassets.Onceagain,majorbankssawadecliningmarketsharebetween2004and2007.Currentmarketsharestandsat84.5%.
FIGUREL
TOTAL LOANS AND ADVANCES%Shareoftotal(domesticandosbooks)
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
22.01%
2008
MajorbanksOtherbanks
2013
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
15.20%
84.80%77.99%
29 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Majorbanks’shareoftotaldepositsismarginallybelowthatoftotalassetsandtotalloans.Currently,collectivemarketshareis83.7%.SincetheGFC,competitionfordepositshasintensified.Themajorbanksshareofdepositspre-GFCfelltothelow70s.
FIGUREM
24.91%
2008
MajorbanksOtherbanks
2013
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
16.24%
83.76%75.09%
TOTAL DEPOSITS%Shareoftotal(domesticandosbooks)
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
30 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Themajorbankshave84%oftotalassets,andahigherproportion(over85%)ofindustrytotalprofits.In2004,theshareofprofitswas74%.Ashiftfrom74%to85%inshareofprofitsrepresentsasignificantchangeintherelativeimportanceofthesefourbanks–seeFigureN.
FIGUREN
Itshouldbestressedthatthisriseinindustryprofitshareisnottheresultoforganicgrowthbuiltonwinningcustomermarketshare.Between2004and2007,majorbankslostmarketsharetosmallerbanks.ItwasonlythemergersofBankWestandSt.George,inadditiontothepricingadvantagesinherentinBaselIIrisk-weightingmethodanddifferentialpricingoftheGovernmentGuaranteeintheGFCthathasputthebigfourbanksintothisstrongmarketposition(seepolicydiscussioninSection5).
TOTAL PROFITS%Shareoftotal(domesticandosbooks)
NOTE:Somedatachangesduetogoingfromquarterlytosmootherannualdata.Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
25.75%
2004
2005
2006
2007
2008
2010
2011
2012
2013
2014
2015
2016
MajorbanksOtherbanks
80%
60%
40%
20%
0%
14.72%
85.28%
74.25%
Date
31 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Oneofthekeydevelopmentsoverthelast13yearsinAustralia’sfinancialsystemisthedeclineinthenumberofdeposit-takinginstitutions.Ithasinfacthalved,mainlydrivenbyconsolidationinthecreditunionindustry.Australiacurrentlyhas99registereddeposit-takinginstitutions.
FIGUREO
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
NUMBER OF DEPOSIT-TAKING INSTITUTIONS
4
2004200620082010201220142016
MajorbanksOtherbanks
200
150
100
50
0 4
95
207
32 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3.2 INTERNATIONAL COMPARISONTheWorldBank’sGlobalFinancialDevelopmentdatabasepublishesamarketshareestimateofthetotalassetsheldbythefivelargestbanksinadomesticmarket.AscanbeseenfromFigureP,ofthe20modernindustrialcountriesselected,thefivelargestAustralianbanksin2015havethethirdhighestmarketshareofbankingassets(94.25%),behindSwedenandFinland.Australia’srankingiscurrentlywellabovethemedianand,indeed,wellintothetopquartile.Thiscurrentpositionisconsiderablystrongerthanin2007.Inthatyear,thetopfivebankshadanestimatedshareofassetsof83.65%whichwasaboutthemedianofthetop20countries.
FIGUREP
ASSET CONCENTRATION - 5-BANKShareofassetsoffivelargestbanks
Source:UnderlyingdatafromTheWorldBank.
SWEDEN
FINLAND
AUSTRALIA
DENMARK
NETHERLANDS
BELGIUM
SPAIN
SWITZERLAND
IRELAND
GERMANY
CANADA
AUSTRIA
BRAZIL
HONGKONGSAR,CHINA
ITALY
FRANCE
UNITEDKINGDOM
MEXICO
JAPAN
UNITEDSTATES
20.00%40.00%60.00%80.00%100.00% 20.00%40.00%60.00%80.00%100.00%
98.29%
99.53%
83.65%
87.74%
93.99%
96.38%
82.25%
93.64%
83.30%
85.36%
87.86%
83.85%
61.77%
77.73%
56.30%
74.24%
76.71%
76.77%
50.16%
43.74%
96.26%
95.25%
94.24%
93.55%
92.67%
90.73%
90.49%
89.23%
88.36%
83.77%
82.25%
80.66%
80.47%
77.78%
75.99%
72.89%
71.42%
70.08%
62.00%
46.53%
2007 2015
MEDIAN MEDIAN
33 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3.3 BANK/NON-BANK MARKET SHAREAustralianregulatoryauthoritieskeeplittledataonthefinancialassetsandliabilitiesofnon-regulatedentities.TheABShavesomeinformationaspartofitsnationalaccounts.ThedominantlendingmarketinAustraliaisthatofresidentialmortgages.ABSstatisticsshowthatbanksandsecuritisationvehiclesdominatethemarket.Banks,includingmajorbanksandallotherbanks,holdaround91%oftotalhousingassets.Securitisationentitiesaccountfor5.74%oftotalloans,withthebalance(2.82%)heldbyothernon-bankentities.However,whilecurrentlevelsarelow,regionalbanksnotethatstrongrecentgrowthratesinlendinghavebeenachievedbysomeunregulatedentitiesinresponsetoAPRA’slimitsofinvestorloans.ThesemacroprudentialrestrictionsonlyapplytoAPRA-regulatedADIs.Inrecentmonths,somegrowthinnon-bankloanshasreflectedinthedata–seebottompanelofFigureQ.
FIGUREQ
Source:UnderlyingdatafromABS.CalculationandvisualisationbyBenchmarkAnalytics.
TOTAL HOUSING ASSETS OUTSTANDING - BY INSTITUTION CATEGORY%Shareoftotalhousingloans
100%
80%
60%
40%
20%
0%
2004200620082010201220142016
Banks
Otherfinancialinstitutions
Securitisers
91.44%
2.82%
10%
5%
0%
-5%
%Differencein12-monthmoving..
%oftotaloutstanding
< 12 nulls
34 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3.4 MARKET SHARE BY SEGMENT/PRODUCTAPRA’smonthlybankingstatisticsenableareasonablydetailedbreakdownofmarketsharebyproductcategory.Thedataseriescommencedin2004,andthefiguresareonlyforthedomesticmarket.AscanbeseeninFigureR,thebigfourbankshavesubstantiallyimprovedmarketshareinallproductmarketssince2007:
• Shareoftotaldomesticresidentassetshasgrownfrom64%to79%;• Totaldeposits,61%to77.3%;• Householddeposits,68%to80%;• Businessdeposits,70%to78%;• Householdcreditcards,80%to82%;• Housinginvestmentloans,77%to85%;and• Housingowner-occupied,75%to81%.
FIGURER
MARKET SHARE IN KEY PRODUCT MARKETS%SHAREOFDOMESTICMARKET
2004 2007 2017Change07-17
Total depositsMajorbanks 66.7% 61.6% 77.4% 25.7%
Allotherbanks 33.3% 38.4% 22.6% -41.1%
Total deposits from householdsMajorbanks 68.8% 67.6% 79.9% 18.2%
Allotherbanks 31.2% 32.4% 20.1% -37.9%
Totaldepositsfromnon-financialcorporations
Majorbanks 73.6% 69.8% 78.2% 12.0%
Allotherbanks 26.4% 30.2% 21.8% -27.8%
Totalloanstohouseholds:Creditcards
Majorbanks 82.7% 80.1% 82.9% 3.5%
Allotherbanks 17.3% 19.9% 17.1% -14.1%
Totalloanstohouseholds:Housing:Investment
Majorbanks 77.2% 76.8% 85.4% 11.1%
Allotherbanks 22.8% 23.2% 14.6% -37.0%
Totalloanstohouseholds:Housing:Owner-occupied
Majorbanks 75.2% 75.0% 81.1% 8.2%
Allotherbanks 24.8% 25.0% 18.9% -24.5%
Total resident assetsMajorbanks 68.6% 64.0% 79.1% 23.5%
Allotherbanks 31.4% 36.0% 20.9% -41.8%Source:UnderlyingdatafromAPRAMBS.CalculationsandvisualisationbyBenchmarkAnalytics.
35 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3.5 DOMESTIC/GLOBAL TRENDSTheBankofInternationalSettlements(BIS)publishedannualdatacomparingthemajorbanksinadvancedandemergingcountriesagainstperformancemetrics(cautionisneededwhenassessingthesignificanceofinternationalcomparisonsduetodefinitionaldifferences).ThecountriescoveredaretheUnitedStates(US),Australia,Canada,Sweden,Japan,Spain,theUnitedKingdom(UK),Switzerland,GermanyandItaly.The2017annualreporthassufficientdatatoallowafive-yearaveragecalculation.Netincometoassetsisakeyprofitabilityindicator.Netincomeisnetinterestplusotheroperatingincome,minuscosts.Asaratiotototalassets,itprovidesasoundprofitabilitycomparison.Overthefiveyearsto2016,Australia’smajorbanksarethesecondmostprofitablewith1.22%.ThemostprofitableistheUSwitharatioof1.28%.Onthismeasure,Australia’slargebanksaremorethantwiceasprofitableastheaverageofadvancedcountriesinthedataset–seeFigureS.
FIGURES
NET INCOME TO ASSETS5yearaverage(2012-2016)
USA
Australia
Canada
Sweden
Japan
Spain
France
UnitedKingdom
Switzerland
Germany
Italy
1.28%
1.22%
1.00%
0.77%
0.58%
0.39%
0.38%
0.26%
0.17%
0.01%
-0.24%Average
-0.40% -0.20% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40%
Source:UnderlyingdatafromBankofInternationalSettlements(BIS).CalculationsandvisualisationbyBenchmarkAnalytics.
36 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Australia’shighprofitabilityisduetomanyfactors,includingapreferencebytheindustryformarginincomerelativetofees.ThiscanbeseeninFigureTwhichcomparesnetinterestincometototalassets.Overthelastfiveyears,Australia’smajorbankshaveaveragedamarginof2%.
FIGURET
NET INTEREST INCOME TO ASSETS5yearaverage(2012-2016)
Source:UnderlyingdatafromBankofInternationalSettlements(BIS).CalculationsandvisualisationbyBenchmarkAnalytics.
USA
Spain
Australia
Canada
Italy
UnitedKingdom
Germany
Sweden
France
Switzerland
Japan
2.25%
2.01%
1.71%
1.56%
1.42%
1.17%
0.97%
0.89%
0.84%
0.79%
0.74% Average
0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 1.80% 2.00% 2.20% 2.40%
37 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Incontrasttolendingmargins,Australia’smajorbanksearnarelativelysmallamountoftheirincomefromfees–seeFigureU.Thischartshowsrelativebankingsystem’sshareoffeesrelativetoassets.Lowlevelsoffeesappealtocustomersthatdonotlikepayingaccountfeesorwhoarenetsavers,butontheotherhand,alowrateofnon-interestrevenueputsagreaterburdenonhousingandbusinessborrowerstosupportbankprofitability.
FIGUREU
NET FEES AND COMMISSIONS TO ASSETS5yearaverage(2012-2016)
Source:UnderlyingdatafromBankofInternationalSettlements(BIS).CalculationsandvisualisationbyBenchmarkAnalytics.
Switzerland
USA
Italy
Canada
Germany
Spain
Sweden
UnitkedKingdom
Japan
Australia
France
1.43%
1.18%
0.84%
0.72%
0.69%
0.65%
0.51%
0.46%
0.45%
0.39%
0.37% Average
0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60%0.00%
38 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
TheBISdataalsoshowsthatAustralia’smajorbankshavenon-performingloanratesthatarewellbelowtheaverageofmajorbanksinotherindustrialisedcountries.Overthelastfiveyearsto2016,loanlossprovisionstoassetshaveaveragedjust0.13%.This,ofcourse,reflectstherelativestrengthoftheAustralianeconomyduringtheperiodoftheGFC.Itisnoteworthythatwhilealowfigure,largebanksinfiveothercountrieshaverecordedlowerlevels:UK(0.12%),Germany(0.10%),Sweden(0.07%),Japan(0.05%),Switzerland(0.01%).SeeFigureV.Australianbanksappeartohavehighmarginsdespitelowdefaults.Inotherwords,theexplanationforhighmarginsisnotahighriskenvironment,butratherlikelytobetheabilityofthesebankstoartificiallyraisethemduetopricingpower.
FIGUREV
LOAN LOSS PROVISIONS TO ASSETS5yearaverage(2012-2016)
Source:UnderlyingdatafromBankofInternationalSettlements(BIS).CalculationsandvisualisationbyBenchmarkAnalytics.
Italy
Switzerland
USA
Canada
France
Australia
UnitedKingdom
Germany
Sweden
Japan
Switzerland
0.83%
0.56%
0.26%
0.17%
0.1%
0.13%
0.12%
0.10%
0.07%
0.05%
0.01% Average
0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80%0.00% 0.90%
39 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3.6 DOMESTIC MARKETS: HERFINDAHL–HIRSCHMAN INDEX ESTIMATESTheHerfindahl-Hirschmanindex(HHI)isacommonlyacceptedmeasureofmarketconcentration.Itiscalculatedbysquaringthemarketshareofeachfirmcompetinginamarket,andthensummingtheresultingnumbers,andcanrangefromclosetozeroto10,000.TheU.S.DepartmentofJusticeusestheHHIforevaluatingpotentialmergersissues.TheU.S.DepartmentofJusticeconsidersamarketwithanHHIoflessthan1,500tobeacompetitivemarketplace,anHHIof1,500to2,500tobeamoderatelyconcentratedmarketplace,andanHHIof2,500orgreatertobeahighlyconcentratedmarketplace.(http://www.investopedia.com/terms/h/hhi.asp)FigureWshowstheHHIestimatesforthedomesticbankingmarketsinAustralia.UnderlyingdataforthesemarketsisderivedfromAPRA’smonthlystatisticspublication.Thesestatisticsdonotincludecreditunionsorbuildingsocieties,althoughincludingtheseinstitutionsisunlikelytochangetheestimatesbyanymaterialamountgiventhesmallmarketsharesofindividualcreditunions.
Thosemarketsrepresentedbya‘red’barhaveanHHIestimateabove1500,whichisthelevelwherecompetitionconcernsstarttoemerge.OneofthekeymarketsisthatofhousinginvestmentlendingwheretheHHIis1,934.Thisisanimportantdomesticmarketthatisnowsubjecttomacroprudentialruleslimitingcreditgrowthto10%andalsorestrictinginterest-onlylending.Theeffectoftheprudentialrulesistomakeitalmostimpossibleforanynon-majorbankstoincreasemarketshare.
FIGUREW
HHI ESTIMATES - BY PRODUCT CATEGORY (2017)(‘Red’=HHIabove1500)
Source:UnderlyingdatafromAPRAMBS.CalculationsandvisualisationbyBenchmarkAnalytics.
Loanstocommunityserviceorganisations
Loanstogeneralgovernment
Other deposit accounts
Depositsfromcommunityserviceorganisations
Depositsfromgeneralgovernment
Loanstohouseholds:Creditcards
Loanstohouseholds:Housinginvestment
Loanstohouseholds:Other
Deposits from households
Loanstohouseholds:Housing:Owner-oc..
Loanstofinancialcorporations
Depositsfromnon-financialcorporations
Depositsfromfinancialcorporations
Loanstonon-financialcorporations
Certificatesofdeposit
Otherborrowings
Bonds,notesandlong-termborrowings
3,151
500 1000 1500 2000 2500 3000 35000
2,742
2,400
2,390
2,140
1,934
1,803
1,800
1,798
1,947
1,560
1,386
1,365
1,318
1,279
1,472
1,683
1,500
40 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
3.7 FUNDING COSTS AND MARGINSFundingcostsandmargindataarederivedusingAPRA’squarterlyperformancestatistics.Missingdatahasbeenestimatedusingtrendsovertheprevioustwoyearsofdata.Expensestoincomeratioisastandardmeasureofoverallefficiency.Onthismeasure,itappearsthemajorAustralianbankshaveratiosmateriallybelowotherbanks(seeFigureX),buildingsocieties,and credit unions. Otherdatasuggeststhemajorbankshavelowratescomparedtointernationalbanks.Thisisprimarilydrivenbyalargevolumeofbusinessduetomarketsharedominanceandtheabilitytospreadfixedcostsacrossalargecustomerbase.
FIGUREX
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
EXPENSES TO INCOME RATIO
52.40%
200520072009201120132015
MajorbanksOtherbanks75%
70%
65%
60%
55%
50%
45%44.24%
62.42%
66.51%
41 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Interestpaidisanotherkeyindicator,itisaproxyforoverallaveragefundingcosts.TheAPRAdatadoesnotenableacurrentpricecalculation,butanaveragefundingcostcanbeestimatedfromtheincome and asset statistics.FigureYtracesaverageinterestpaid(fundingcosts)bybankssince2004.Asiswellknown,theinterestratespaidonborrowinghasbeenconsistentlylowerformajorbankssincetheGFCin2007.Combinedwithrelativelylowexpensesduetoscale,thisgivesmajorbanksadominantmarketadvantage.
FIGUREY
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
INTEREST RATE PAID
2.38%
200520072009201120132015
MajorbanksOtherbanks
7%
6%
5%
4%
3%
2% 2.20%
4.92%
5.33%
42 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Withlowerexpensesduetoscaleandlowerfundingcosts,themajorbankscanusethatcostadvantagetopricetheirproductsmarginallyundertheaverageofotherbanksinthemarket.Latestdatashowsthemajorbankschargecustomersanaverageof3.93%interestrate,comparedtootherbanksat4.17%.Thisenablesmajorbankstopartlymitigatepotentialmarketsharelossduetoreputational and service levels.FigureZshowsthatpre-GFCandpre-BaselII,themajorbanksonaveragepricedproductsabovethatofotherdeposittakinginstitutions.Note-between2004and2007themajorbankslostmarketshare to smaller rivals.CareneedstobeusedininterpretingFigureZastheaverageinterestreceivedisnotadjustedforassetcomposition.Forexample,someADIswillhaveahigherproportionofbusinessassetswhicharetypicallyriskierandhavehigherinterestratestocompensateforthatrisk.(Foramoreapplestoapplescomparisonofpricing,seehousingratecomparisonsinFigureAA.)Since2007,however,themajorbankshavebeenabletoholdaverageinterestratesbelowotherbanks.BaselII(introducedin2008)islikelytobeakeydriverofthisasitenabledthemajorbankstosimultaneouslyreducemarginsandmaintainthereturnonequity.
FIGUREZ
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
INTEREST RATE RECEIVED
4.17%
200520072009201120132015
MajorbanksOtherbanks
8%
7%
6%
5%
4% 3.93%
6.51%
6.79%
43 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Inthehousinglendingmarket,thedatashowsthemajorbanksarepricinghousingloansatroughlythesameaveragerateasotherdeposit-takinginstitutions–seeFigureAA.Indeed,thelatestdata,whichreflectschangestomortgageriskweights,showsthemajorbankshavestartedtopriceaveragemortgagesaboveotherbanks.
FIGUREAA
INTEREST RATE RECEIVED (HOUSING)
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
4.34%
200520072009201120132015
MajorbanksOtherbanks
8%
7%
6%
5%
4% 4.16%
6.78%
6.90%
44 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Thestoryofthemajorbanks’relativeprofitabilitycanbeseeninFigureBB.Hereweseethatthederivednetinterestmargin(NIM)ofthemajorbankshasbeenconsistentlyaboveotherbankssince2004.ThegapwaswidestduringtheGFCasaresultofthedifferentialpricingoftheGovernmentGuarantee,andhasonlyrecentlyconverged.
FIGUREBB
INTEREST MARGIN (ALL LOANS)
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
1.80%
200520072009201120132015
MajorbanksOtherbanks
2%
1%
1.74%
1.46%
1.59%
45 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Importantly,theconvergenceintheinterestmargininlendingoverallhasnotbeenseeninthehousingmarket.Themajorbanksmaintainanetinterestmargininhousingloansat2.14%,comparedotherbanksat1.79%.Thisshowstheextentofprofitabilityofmortgagelendingforthemajorbanks.
FIGURECC
INTEREST MARGIN (HOUSING LOANS)
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
1.86%
200520072009201120132015
MajorbanksOtherbanks
2%
1%
2.14%
1.79%
1.57%
46 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Asaresultofthissuperiornetinterestmarginandtheincreasedleverageavailabletoadvancedaccreditedbankspursuinglowerrisk-weightedassetsi.e.housingmortgages,themajorbankshavereturnedconsiderablyhigherreturnsonequitysince2006asseeninFigureDD.(Ofcourse,analysisofNIMideallyalsotakesaccountoflendingcomposition.)
FIGUREDD
NET PROFIT TO SHAREHOLDERS EQUITY
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
14.73%
200520072009201120132015
MajorbanksOtherbanks18%
16%
14%
12%
10%
8%
6%
10.37%
8.69%
12.55%
47 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Netincomeisafunctionoftheamountofrevenuederivedfromabank’sassets,andthenthisincomeiscomparedtototalshareholders’capital.ThefourbankscanmaintainsignificantlylowerlevelsofcapitalduetotheIRBrisk-weightingsystem.
FIGUREEE
SHAREHOLDERS EQUITY TO TOTAL ASSETS
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
7.67%
200520072009201120132015
MajorbanksOtherbanks
9%
8%
7%
6%
5%
7.52%
6.36%
7.09%
48 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
4 INDIVIDUAL REGIONAL BANK BUSINESS MODEL/SThehistoryofregionalbanksgoesbackbeyondthefoundingoftheAustralianFederationin1901.Nearlyalldomestically-ownedbanksinAustraliaeithercommencedasregionalbanks,buildingsocieties or credit unions.Regionalbankscompeteinallmarketsbuthavethegreatestpresenceinretailbanking,servicinghouseholddemandfor:depositaccounts;creditcards;housingloans;personalloans;andsmallandmediumenterpriseproducts.Theyarelessrepresentedininstitutionalandlargecorporatefinancing,althoughmostregionalbankshavesomelargecorporatecustomers.Mostregionalbankshavecompetitiveagribusinessproductofferings.Regionalbankshavedistinguishedthemselvesoveralongperiodoftimewithcustomersatisfactionandtrustlevelsthatfarexceedthemajorbanks.Customersatisfactionsurveysfromarangeofindependentresearchfirmsregularlyrankregionalbanksaheadoftherestofthemarketonarangeofcustomersatisfactionmetrics.Scoresforthebroaderindustryhavebeentrendinghigherinrecentyears,demonstratingthevalueofcompetitivetensionindrivingimprovementsincustomersatisfaction.Thisachievementissignificantwhenseeninlightofthefundingandscaleadvantagesoflargeinstitutions.TheregionalbanksinAustraliahavemanagedtoachievestrongcustomersupportthroughmanagementculturesthatunderstandtheimportanceofcustomerservicetolong-termsuccess.Anothercloselyrelatedfeatureofregionalbanksishowtheyhavedevelopedandmaintainedacorporate structure to embed the philosophy of customer service and develop niche roles in retail banking.ExamplesincludeBendigoBank’sCommunityBank®modelandBOQ’sOwner-ManagedBranch model.
4.1 REGIONAL BANKS AND CONNECTION TO CUSTOMER/COMMUNITY/ DIVERSITYAsregionalbanksdonothavethescaleandfundingcostadvantagesoflargerbanks,theyhaveneededtodevelopacorporatestructureinordertoexcelincustomerservice.Thefivebanksthatsupportthissubmissionhaveeachutilisedadifferentstrategytodothis.
4.1.1 Bendigo and Adelaide Bank TheBendigoBankisacommunity-focusedretailbankthatcommencedoperationsin1858.In2007BendigoBankmergedwithAdelaideBanktoformBendigoandAdelaideBankLimited,nowthefifthlargestdomesticretailbankinAustralia.BendigoandAdelaideBank’svisionistobeAustralia’smostcustomerconnectedbank.Wedothisbyfocusingonenablingcustomerchoice;exploringopportunitiesforgrowth;partneringforsharedsuccess;developingourpeople;anddrivingcapitalandoperationalefficiency.BendigoandAdelaideBank’swellestablishedgeographicfootprintprovidesfullbankingandfinancialservicesthrough650serviceoutletsacrossAustralia,includinganetworkofalmost500companyandCommunityBank®Branches.Thereisalsoanetworkofmobilerelationshipmanagerstoensurethedeliveryofpersonalised,immediateandconvenientservicestosupportourcustomerswhenandwheretheyareinneed.Thisisparticularlyimportanttothoselocatedinremoteareas,andinfarmingcommunities.Customerscanaccesstheirbankingandphoneservices24/7,andcanapplyonlinefordepositaccounts,creditcards,personalandhomeloans,superannuationandmanagedfunds.BendigoandAdelaideBankhaveafullservicebusinessbankingdivisionandownAustralia’slargestlocallyownedagriculturalbank,RuralBank.
49 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
4.1.2 Bank of QueenslandTheBankofQueensland(BOQ)wasestablishedin1874astheBrisbanePermanentBenefitBuildingandInvestmentSociety,thefirstofitskindinQueensland.In1887itconvertedintoabankbutdidnotbecomeatradingbankuntil1942.In1970itofficiallybecametheBankofQueenslandandwaslistedontheASXin1971.Throughoutthe1970sand1980sthebankcontinuedtogrow,andin1985itbegantoopenregionalbranches.BOQpridesitselfonitscommitmenttocustomerservice,deliveredthrougharangeofchannelsincludingitsuniqueOwner-Managedbranch(OMB)model.Itoffersafullrangeofsimple,easytounderstandbankingproductsandservicestoindividualsandbusinesses.Inthepast15years,BOQhasundergoneconsiderableexpansion,bothorganicallyandalsothroughtheacquisitionofvariousbusinessesincluding,mostrecently,VirginMoneyAustralia.BOQisnowalargeregionalbankwithassetsof$42.5billion.ItsOMBmodel,afranchisemodelwhichmeansthebranchisownedandmanagedbypeoplewholivelocally,knowtheircustomerswellandarewillingtogotheextramiletoensurethattheyalwaysreceiveexceptionalpersonalservice.Thisrelationship-baseddistributionapproachextendsacrossBOQ’sentirebusiness,includingRetailandOnlineBanking,BusinessBanking,AgribusinessandFinancialMarkets,Equipment,Debtor&VendorFinanceandInsurance.CurrentlyBOQoperates265branchesacrossAustralia,andprovidesfee-freeaccessforitscustomerstomorethan3000ATMsnationally.In2013thewebsiteMozo,whichfocusesonbankingandinsurancecomparison,votedBOQoneofAustralia’stopfivebanksbasedonretailcustomerfeedback.AsBOQhasbeenexpandingitsBusinessBankingpresence,includingamoveintoagribusiness,ithastoppedtheEast&Partnersbusinessbankingcustomers’satisfactionsurveyforthefiveyearsstraight,uptoandincluding2013.
4.1.3 ME BankMEBankwasfoundedbyAustralia’sindustrysuperfundsin1994asSuperMemberHomeLoanswiththeprimarypurposeofprovidinglow-costhomeloanstoAustraliansbelongingtoindustrysuperannuationfunds.In2001MEBankreceiveditsbankinglicense.TodayMEis100percentownedby29ofAustralia’slargestindustrysuperfundswhocollectivelyhaveover$200billioninfundsundermanagementandmorethan5.5millionmembers.MEBankisheadquarteredinMelbourne.Havingbegunasahomeloanoriginator,MEBanktodayoffersafullrangeofpersonalbankingproductsincludinghomeloans,creditcards,personalloans,transactionaccounts,onlinesavingsaccountsandtermdeposits.MEBankhasover420,000customersand$26billioninassets.MEBank’suniquebusinessmodelcentresarounditscustomer-firstphilosophyand,duetothebackingofsomeofAustralia’sfunds,hasthestrengthandcapabilityofacommercialbank.OurpurposeistohelpAustraliansgetaheadbygivingthemwaystogetmorefromtheirsavings,paylessontheirloansandcutdownonfees–howeverwecan,wheneverwecan.Wemakebankingassimpleaspossibleinthebeliefcustomersshouldn’thavetowadethroughjargontofindwhattheyneed,andopeninganaccountshouldbeeasy.Andbecausefinancialknow-howdoesn’talwayscomenaturally,wegivecustomerstoolstospendwiserandsavesmarter:thingslikeouronlineschoolofmoney‘ed’,whichisfast,freeandsimpletouse.
50 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
4.1.4 Suncorp BankSuncorpBankwasfoundedin1902astheQueenslandAgriculturalBankandhasprovidedbankingservicestoindividuals,SMEsandagribusinessinregionalcommunitiesofAustraliaforover110years. AsanAuthorisedDeposittakingInstitution(ADI)regulatedbyAustralianPrudentialRegulationAuthority(APRA),SuncorpBankisAustralia’sleadingregionalbankandispartoftheSuncorpGroup.SuncorpGroupLimitedisatop20ASX-listedcompanywith$97billioninassets.ThecompanyhasevolvedfromhavingstrongQueenslandoriginstobecomeaunique,diversifiedfinancialservicescompany,deliveringhighly-valuedbankingandwealth,andinsuranceproductsandservices,acrossAustraliaandNewZealand.TheGroupemploysaround13,400employeesandservesclosetoninemillioncustomersthroughitstrustedbrands,ofwhichapproximatelyonemillionareSuncorpBankcustomers.Withanetworkofover200branches,agencies,businessbankingcentres,morethan2000ATMsacrossAustralia,andemployingaround2,900staff,SuncorpBankoffersastrongsuiteoffinancialservicesandsimplebankingproducts,whichinclude:
• Personalbanking-includinghomeandpersonalloans,savingsandtransactiondepositaccounts,marginlending,creditcardsandforeigncurrencyservices;
• Smallbusinessbanking-includingfinancialsolutionsforSMEswithborrowingrequirementsofuptoA$1million;
• Commerciallending-includingfinancialsolutionsforSMEswithborrowingrequirementsofmorethanA$1million;and
• Agribusinesslending-includingfinancialsolutionsandservicedrelationshipmanagementforruralproducersandassociatedbusinessesinruralandregionalareas.
SuncorphasbegunamajortransformationoftheorganisationincludingtheestablishmentoftheSuncorpMarketplace,witharenewedpurposetocreateabettertodayforallofourstakeholders,includingcustomers,shareholders,peopleandcommunities.Creatingvalueforthecustomerisaguidingprincipleindecision-making.
51 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
4.1.5 AMPAMPisoneofAustralia’soldestcompanies,andsincethebeginningwehavebeencommittedtoimprovingthecommunitiesinwhichweoperate.Webelievethatoursuccessislinkedtotheprosperityofourcustomers,shareholders,advisers,employeesandourcommunities.AMPisafinancialservicescompanyinAustraliaandNewZealandprovidingsuperannuationandinvestmentproducts,insurance,financialadviceandbankingproducts.AMPformedin1849astheAustralianMutualProvidentSociety,anon-profitlifeinsurancecompanyandmutualsociety.In1998,itwasdemutualisedintoanAustralianpubliccompany,andlistedontheAustralianandNewZealandstockexchanges.Ourpurposeistohelpcustomersowntheirtomorrow,helpingthemtakecontroloftheirmoneyandachievetheirfinancialgoals.WeareAustraliaandNewZealand’sleadingspecialistwealthmanagementcompany.For168years,wehavededicatedourselvestohelpingourcustomersachievetheirfinancialgoalswithqualityproductsandexpertadvice.Theworldhaschangedimmeasurablysinceourfoundingdays;andwhilewehaveevolvedandgrowntokeeppace,ourpurposehassteadfastlyremainedtohelppeople own a better tomorrow. AMPBankisanAustralianretailbankofferingresidentialmortgages,deposits,transactionalbanking,andSMSFproductsforaround100,000customers.AMPBankdistributesthroughbrokers,AMPadvisers,anddirecttoretailcustomersviaphoneandinternetbanking.Asthebankingarmofawealthmanager,AMPBank’sroleistoleverageandgrowthegroup’scustomerbaseandsupportcustomergoalsthroughprovidingbankingsolutionstobothadvisedandnon-advisedcustomers.
51 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
52 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
4.2 ALIGNMENT TO CUSTOMER INTERESTWithoutthesubsidyofbeinga“toobigtofail”bank,regionalbankshaveneededtostructuretheir operations or develop a level of trust in the community that enables them to overcome the disadvantagesoflimitedscaleandhighercosts.Whileregionalbankshaveprofitincentivesasdolargerbanks,theyhaveastrongerneedtohardwirecustomerandcommunityfocusintotheirobjectivesandoperations.FigureFFidentifiesthecoreattributethatenablesthisdeepalignmentand differentiation.
FIGUREFF
BANK CORE ATTRIBUTES ALIGNING INTERESTS OF OWNER & CUSTOMERS
AMP Australianicon,diverseownership,andfocusedonhelpingcustomers own their tomorrows
Bendigo and Adelaide Bank CommunityBank®model
BOQ Queenslandfocus&owner/managermodel
ME Bank Mutual structure of owners
Suncorp Bank Queenslandorigin&diversifiedearningsenablingrelationshippricing
4.3 REGIONAL BANKS SET THE “COMPETITIVE FRONTIER” WHILE MAJORS ACHIEVE HIGHER ROE’SThepriceofintermediationisthelendingmargin,thedifferencebetweentheinterestratepaidandtheinterestratecharged.Theavailabledatasuggeststhatthemajorbankshave,atleastsincetheGFCandBaselIIwasintroduced,maintainednetinterestmarginsabovesmallerbanks4.Ineffect,theregulatoryandprudentialframeworkhasallowedmajorbankstopriceconsistentlywithotherbanks,butthenusetheircostsavingstopaymuchhigherreturnstoshareholders.
4.4 GROWING BUT CROWDED OUT BY REGULATORY ARBITRAGEUpuntiltheGFCandwhenBaselIIwasintroduced,themajorbankswerelosingmarketsharetosmallerdeposit-takinginstitutions.Sincethen,themajorbankshavebeenabletoincreasemarketsharethroughmergers,andthenmaintainthatmarketsharethroughtheirregulatoryadvantages–lowerfundingcostsandpreferentialriskweights.Whileregionalbanksaregrowinginlinewiththesystem,theimpositionofmacroprudentialrules,andtheincreasinglayersofregulationaremakingitverydifficultforsmallerbankstomakeinroadsinmarketshare.Recentindustryissueshaveprecipitatedamajorregulatorybacklashanditisthelargerbanksthatbearalowerrelativecostincomplyingwiththosefixedregulatorycosts.
4SeeAPRAQADIPS
53 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
5 KEY POLICY ISSUES/RECOMMENDATIONS5.1 “TOO BIG TO FAIL” / LEVYThemajorbanksinAustraliaare“toobigtofail”,meaningtheirfailurewouldleadtoapoliticallyunacceptable economic disturbance. APRAhaspublicly‘designated’Westpac,NAB,CBAandANZaswhat’scalleddomesticsystemicallyimportantbanks(D-SIBs).Whilethismayappearanabstractandtheoreticalissue,ithasdailyconsequencesforbankingcompetition. TheratingagencyStandard&Poor’s(S&P)givesthemajorbanksathree-notchcreditratinguplifttoreflecttheir“toobigtofail”status,significantlyreducingtheinteresttheypayonwholesalefunding.ReserveBankofAustralia(RBA)research5 released last year indicated that “….the major banks have received an unexplained funding advantage over smaller Australian banks of around 20 to 40 basis points on average since 2000.”InFigureGG,thecharttracestheaverageinterestratepaidondepositsandborrowedfunds.Thisisagoodproxyforgeneralfundingcosts.Morerecentdataindicatesthemajorbankshaveafundingcostadvantageof18basispoints,butthatthisisatthelowerendofatrendestablishedpost-GFC.FigureHHshowsaveragespreadsoncorporate(non-financial)bondsbetweenA-ratedandBBB-rated securities.Evenat20basispoints,theupliftenjoyedbythemajorbanksissignificantlylargerthanthesixbasispointlevyintroducedbytheFederalGovernment.Inlightofthisadvantage,regionalbankssupport6theFederalGovernment’simpositionofa0.06%taxonbankswithspecifiedliabilitiesexceeding$100billion.Whilethelevyonlycompensatestaxpayersforaproportion(evenatthelowerendofbenefitestimates)ofthe“toobigtofail”subsidy,itisapositivestepforcompetitiveneutrality.AsummaryoftheadvantagewasincludedinSuncorpBank’ssubmissiontotherecentSenateInquiryintotheMajorBankLevyBill:
5ResearchreleasedunderFreedomofInformation(FOI).Seelink:http://www.rba.gov.au/information/foi/disclosure-log/rbafoi-151609.html6TheGovernment’slevyonfivebanksisanawkwardissueforregionalbanks.Aspartofthebusinesscommunity,wetypicallyargueagainsttaximpositionsonbusinessactivity.However,thereisalegitimaterolefortaxinaddressingmarketfailuresorcompensatingtaxpayersforcontingentrisks.Onbalance,wesupportthelevyduetoitsroleinpartlyaddressingthe“toobigtofail”fundingsubsidy.
54 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
“…the major banks currently enjoy an artificial funding cost advantage over the rest of the sector by virtue of their status as being “too big to fail.”Since these banks are considered “too big to fail”, it is commonly accepted that they would receive Government support if they ever found themselves in financial difficulty. In effect, it is assumed the Government implicitly guarantees these institutions, which leads to them enjoying higher credit ratings than they otherwise would. S&P has consistently stated that it values the Australian Government’s implicit support as being worth a two-notch uplift, and that the credit ratings of these institutions are therefore two notches higher than they would be in the absence of this support.This uplift has a direct impact on major bank funding costs, making them lower than they would otherwise be, and providing them with an artificial advantage not available to the rest of the sector.While difficult to quantify the value of the uplift, it is clearly significant. Credible and independent commentators assert the advantage sits well above six basis points.More recently, the scale of this advantage has become even greater. Late last month, S&P announced that it had lowered the credit ratings of 23 Australian financial institutions, but left the credit ratings of the major banks Credit Profile (SACP) of the majors by one notch, their overall issuer ratings remained unchanged, “…reflecting our expectation of likely timely financial support from the Australian Government, if needed…” In effect, this means the two notch upgrade that was previously enjoyed by the majors banks has now been increased to three notches.”
54 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
55 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
5.2 POSSIBLE LEVY DESIGN CHANGESRegionalbankssupporttheGovernment’simpositionofalevyonthemajorbanksforthereasonsoutlinedpreviously,albeitasmembersofthebusinesscommunityourgeneraldispositionistoopposetaxonbusinessactivity.Likeallareasofpublicpolicy,designchangesthatreduceunintendedconsequencesorimproveoutcomesshouldbeconsidered.RegionalbanksseeacaseformorestronglytyingthelevytoestimatesoftheactualfundingcostadvantageenjoyedbytheD-SIBbanks.ThisestimatecouldbeundertakenannuallybytheCouncilofFinancialRegulators(COFR).FederalCabinetcoulddecidewhatproportionoftheadvantagewouldbetaxed.Bymorestronglytyingthelevytothefundingcostadvantage,thelevyisindisputablyrationalandaworthwhilemicroeconomicreform,inadditiontocompensatingtaxpayersfortheriskassociatedwithsystemicallylargebanks.Ofcourse,regionalbanksalsoacknowledgethatthereareotherpoliciesthatcouldmitigatethissubsidy,suchashighercapitallevelsimposedthroughtheD-SIBlevy.
FIGUREGG
INTEREST RATE PAID
Source:UnderlyingdatafromAPRAQADIPS.CalculationsandvisualisationbyBenchmarkAnalytics.
5.33%
200520072009201120132015
MajorbanksOtherbanks
7%
6%
5%
4%
3%
2%
2.38%2.20%
4.92%
56 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
FIGUREHH
Recommendation: A. Regional Banks support the Government’s levy on the major banks and Macquarie as a means of partly addressing the “too big to fail” funding advantage. As the levy only recoups a proportion of the “too big to fail” funding benefit, further policy interventions to reduce the benefit should be considered.
Source:UnderlyingdatafromRBA.CalculationsandvisualisationbyBenchmarkAnalytics.
CORPORATE BOND PRICINGSpreadtoAustralianGovernmentSecurities,3-10yeartargettenors
97.0
200620082010201220142016
A-ratedbondsBBB-ratedbonds
450
400
350
300
250
200
150
100
50
0
137.8
412.3
102.4
430.9
239.0
276.1
342.1
264.0
203.3
231.0252.7
174.6
77.8
114.2
285.3
81.7
274.8
190.7 187.3
212.5
157.8
121.1
154.6 160.1
121.8
57 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
5.3 CAPITAL/RWAAnothersignificantsubsidytothemajorbanksisimplicitinthedualsystemofestimatingrisk-weightedassets.Asminimumcapitalrequirementsaresetbyreferencetorisk-weightedassets(notthefullvalueofassets),theseestimatesarecriticalfordeterminingcapitallevelsand,therefore,overallleverageandprofitability.SmallerbanksuseanAPRA-prescribedapproachcalled‘standardised,’whereasthemajorbanksandMacquarieuseanAPRA-accreditedapproachcalledinternalratingsbased(IRB).Thissystemwasintroducedin2008(BaselII)andcontinuedunderBaselIII.
58 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
Thisdualsystemhasresultedintwoproblematicoutcomes:(a)Widevariationsinrisk-weightestimatesbetweensmaller‘standardised’banksandIRBbanks,especiallyonresidentialmortgageloans.Sincetheintroductionofthedualsystemin2008,themajorbanks’mortgagerisk-weightedassetsfelltoanaverageof16%,comparedtotheregionalbanks’averageofaround39%.(b)Mortgageloansby‘standardised’banksaresubjecttoa35%riskweightfloor,whereasIRBbanksdonotfaceaper-loanfloor.Forsafeloans,suchasthosewithaloan-to-valueratios(LVRs)below70%,anIRBbankcanassignverylow-riskweights,andholdnegligiblecapitalagainstthoseloans.ThisgivestheIRBbankahugepricingadvantageasonlysmallinterestmarginsareneededtocovercapitalcosts.
59 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
OneIRBbankhaspublisheddatashowingaroundone-quarterofitsresidentialmortgageshaverisk-weightsbetween0.0%and5%7.Whereasthelowestrisk-weightofanysmaller,standardisedbankis35%-amaterialdifferential.Thedifferentialhasmaterialimplicationsforreturn-on-equityoutcomes(perloanbasis)and,assuch,theabilityofIRBbankstoachievereturntargetswithlowerinterestmargins.Facedwiththisrisk-weightdifferentialsince2008,somesmallerbankshaveinvestedheavilyinriskmanagementcapabilitytoachieveIRBaccreditation8.Withverylowrelativerisk-weightsforhousingmortgages,thebigfourbanksallhavestrategicobjectivestogrowtheirmortgageportfolios9,althoughthesestrategiesarepushingagainstanalreadyheavilyindebtedhouseholdsector.Theconcernisthatmortgagelendinghascomeatthecostofcredittotherealeconomy,thatofnon-financialcorporationsandsmallbusinesses.InAugust1991,mortgagesaccountedforjust17%ofmajorbanks’assets.Today,mortgagesaccountfor45%oftotalassets10.ABSdatasuggeststhatlackofaccesstoadditionalfundsisabarriertobusinessperformanceand,critically,toinnovation.FigureIIshowsthatinthelatestABSsurveyofbusinesscharacteristics,14.3%ofbusinessesrespondedthatlackofaccesstoadditionalfundswasabarriertotheirbusinessperformance.Theleadingbarrierwastheneedtolowerprofitmarginstoremaincompetitive,followedbyanabsenceofskilledlabour.
FIGUREII
7SeeCBAPillar3report,December2016.8PubliclyavailablemediareportshaveidentifiedsomeofthesmallerbanksthathavelodgedIRBapplicationswithAPRA.9PWCnotes:“Our review undertaken in May found that Australia’s major banks had to work hard in the first half of 2017 to maintain momentum, with two key factors supporting their results: continued growth in Australian housing lending and reductions in credit losses. In the quarter just passed, the story has remained largely unchanged as major bank executives executed the strategic and portfolio changes made to date”. (PWC,2017)10Balancesheetdataforthemajorbanksin1991isfoundontheRBAwebsitehttp://www.rba.gov.au/statistics/historical-data.html.RecentdataistakenfromAPRA’smonthlybankingstatistics.
BARRIERS TO GENERAL BUSINESS ACTIVITIES OR PERFORMANCE%ofrespondents,Allbusiness
Source:UnderlyingdatafromABS.CalculationsandvisualisationbyBenchmarkAnalytics.
Lowerprofitmarginstoremaincompetitive
Lackofskilledpersons:inanylocation
Lackofaccesstoadditionalfunds
Lackofcustomerdemandforgoodsorservices
Costofinputs
Outstandingaccountsreceivablelimitingcashflow
Governmentregulationsandcompliance
Lackofskilledpersons:withinthelabourmarket
Lackofskilledpersons:withinthebusiness
Environmental factors
23.4%
5.0% 10.0% 15.0% 20.0% 25.0%0.0%
16.3%
14.3%
13.7%
12.9%
12.4%
10.8%
9.3%
4.5%
12.0%
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Intermsofbusinessesthatareactivelyinnovative,around24.5%ofsurveyrespondentscitedlackoffundsasabarriertoinnovation,thesecondhighestbarriercited,seeFigureJJ.Byadjustingtherelativerisk-weightbetweenIRBandstandardised,andmortgagesandnon-retailloans,therewillbeahigherincentiveatthemargintoincreasebusinesslendingrelativetohousinglending.Mosteffectiveislikelytobeanincreaseinthemortgagerisk-weightattheverysafeendofthelendingmarket,i.e.theminimumrisk-weightonloanswheretheborrowerisPAYEandtheloantovalue(LVR)isbelow70%.Thelowriskweightsinthissegmentmakeitahighlyattractiveassetformajorbanks,andactsasadisincentivetoallocatecapitaltobusiness.
FIGUREJJ
BARRIERS TO INNOVATION%ofrespondents,Innovationactivebusinesses
Source:UnderlyingdatafromABS.CalculationsandvisualisationbyBenchmarkAnalytics.
Lackofskilledpersons:inanylocation
Lackofaccesstoadditionalfunds
Costofdevelopmentorintroduction/implementation
Lackofskilledpersons:withinthebusiness
Uncertaindemandfornewgoodsorservices
Governmentregulationsorcompliance
Lackofskilledpersons:withinthelabourmarket
Lackofaccesstoknowledgeortechnology
Adherence to standards
26.5%
5.0% 10.0% 15.0% 20.0% 25.0%0.0%
24.5%
21.0%
17.9%
17.7%
15.8%
7.8%
5.2%
16.0%
30.0%
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Intheinterestsofcontributingpositivelytofurtherreformofrisk-weights,theregionalbankshavedesignedasetofreformprinciples.Theseare:
1. That the gap between IRB and standardised approaches remains too wide and that it should be further narrowed.
2. That the gap is most pronounced for loans with the lowest risk, and that this is where efforts to narrow the gap should be focussed.
3. That the gap is too wide in aggregate terms as reflected in the different leverage across bank balance sheets. There should be a narrowing in the difference in aggregate capital levels required under IRB and standardised approaches.
That narrowing can be achieved by either lowering standardised risk-weights or raising IRB risk weights. For standardised loans, the risk-weight floor (currently 35%) should be reduced for low risk loans. Basel is currently considering a risk weight of 25% for low risk mortgages held by standardised ADIs.
4. Should APRA form a view that IRB capital levels need to increase, this should be achieved through the introduction of a risk-weight floor on individual IRB mortgages, rather than via increases in the correlation factor.
5. That any narrowing does not eliminate the incentive for smaller ADIs to seek advanced accreditation.
Recommendation: B. Regional banks advocate further reform of risk-weight setting as per the set of key principles.
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62 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
5.4 MACROPRUDENTIAL COMPLEXITYIn2015,APRAandtheRBAimposedamacroprudentialruleonmortgageinvestmentlending,a10%annualgrowthlimit.InMarch2017,APRAannounceda30%capontheproportionofmortgageloansthatareinterest-only.ThecountercyclicalbufferinAustraliaiscurrentlysetatzero.The10%investorportfoliogrowthrestrictionhastheeffectoflocking-inmarketsharestatusquo.Itisineffectsimilartothe‘yellowflag’beingwavedattheGrandPrix,wherealldriversarethenprohibitedfromovertakingoneanother.Macroprudentialrules(yellowflags)canhaveimplicationsforconsumerchoiceandpricing.Thisconsumercostneedstobefullyconsideredinpolicydecisions,inadditiontoimplicationsforcompetitive neutrality.Thelargestfourbanksaccountformorethan80%ofmortgageinvestorloans.Byrestrictingallbankstoamaximumof10%growth,itisimpossibleforasmallerbanktomakeanyheadwayinincreasingmarketshare,particularlywhensystemdemandisgreaterthanthecap.Regionalbanksarekeentoexploremechanismsthatbetterbalancetheneedformacroprudentialtargetstobemet,butdonotunderminecompetitionintheprocess.Asoutlinedinsection1.9,whenS&PdowngradedAustralianbanksduetohousingpriceconcerns,themajorbankswereexemptedonthebasistheyhavegovernmentsupport.Theeffectofthisexemptionistoputmorepolicyweightonmacroprudentialmortgageloanlimitstocoolthehousingmarket.Thisdisadvantagessmallerbanksbylockinginmajorbankmarketshare.AgoodexplanationoftheissueanditsimplicationsgenerallywasprovidedbyDavidCarter,Suncorp’sCEOBankingandWealth,tothePCroundtable:
“Policy changes that fail to consider competition can also lead to poor customer outcomes. For example, while we understand the need for APRA to announce macroprudential interventions, the blunt nature of the tools selected has effectively frozen investor and interest only market shares at current levels, with detrimental consequences for competition. The caps mean that smaller banks are limited to competing for owner occupied loans, as they cannot freely compete for investor and interest only loans without breaching APRA’s cap. Customers with investor and interest only loans find it harder to switch banks, and the major banks, with the largest exposures to lending of this kind, can take advantage of the situation.It is unsurprising that the major banks have significantly increased interest rates where competition is restricted (investor and interest only lending) and reduced interest rates where competition is strong (owner occupier loans). In aggregate, these changes have significantly improved the financial position of the major banks. For example, since December last year, one major bank has increased investor interest rates by 23 basis points, and interest only interest rates by 50-70 basis points, while reducing owner occupier interest rates by 5 basis points. This has resulted in an average interest rate increase of around 23 basis points across their residential mortgage portfolio, delivering an annualised benefit of almost $900 million.” (Carter, Evidence, Transcript of Proceedings, 2017)
AnalternativecompetitivelyneutralapproachisforAPRAtoimplementitsmacroprudentialinvestorlendingdisincentivesbyusingminimumcapitalrequirementstohelprestrainthosebankswhichavoidedtheS&Pratingdowngrade(duetogovernmentsupport).
Recommendation: C. APRA should engage with regional banks to design macroprudential rules that better balance macro outcomes and banking competition, and consider greater policy weight being given to minimum capital requirements.
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5.5 BROKER (VERTICAL INTEGRATION)Around53%11ofmortgageloansarearrangedthroughbrokers.Itisanimportantcomponentofthemortgageloandistributionbusiness.ArecentASICreview(ASIC,March2017)foundevidencethatmajorbanks’ownershipofbrokerplatformsinfluencestheproportionofloanstheownerreceivesfromthebroker.Thisisaregulatoryconcernbecausemortgagebrokersareobligatedtoensureconsumersgetthemostsuitableloanproduct.ASICnoted:
“Our review identified that competition in the home loan market is affected by ownership relationships between lenders and aggregators and the inability of smaller lenders to access or remunerate brokers in the same way as larger lenders.Within consumer markets, better outcomes are usually seen where businesses compete with each other by offering the best product or service at the best possible price to the consumers, rather than competing with each other to offer better incentives to the distributors of their products. In the home loan market, this means that lenders should be primarily competing on the best home loan and customer service, rather than competing by offering higher commissions to aggregators and brokers.…While the findings for Macquarie were mixed, overall there is evidence from the data for 2012–15 that ownership structures—particularly when combined with white label arrangements—have an impact on loan flows in the home loan market.” (ASIC, March 2017)
11SeeAustralianBrokerarticle:http://www.brokernews.com.au/news/breaking-news/nonmajor-to-make-broker-channel-comeback-227860.aspx.NotethatASIC’sreviewofmortgagebroking(publishedin2017)foundthatbrokersarranged54.3%ofloansforthosebanksincludedintheASICsurvey(ASIC,March2017,p.8).12Regionalbankssupporthavingcustomeroutcomesatthecentreoftheindustry’sapproachtochangestotheremunerationandgovernancepracticesinthemortgageindustry.Wesupportanindustryself-regulatoryapproachwhich promotes competition at all levels of the industry and ensures appropriate transparency of process for industry participants,governmentandconsumers.
Smallerbanksaretypicallydependentonunbiaseddistributionnetworkstoovercomethedisadvantageofsmallerphysicalbranchnetworksandmarketingbudgets.Regionalbankssupportstrongregulationinthisarea,includingeffectiveownershipdisclosureobligations.InitssubmissiontotheFSI,theregionalbanksrecommendedthatmortgagebrokersandaggregatorsownedbythemajorbanksreportpublicly12andregularlyontheproportionoftheirloan business directed to their owners.
Recommendation: D. Mortgage aggregators and brokers owned by major banks should publicly (and regularly) report on the proportion of loans they direct to their owners.
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5.6 REGULATORY BURDENRegulatorychangeinthebankingsystemisproceedingatanunprecedentedpace.ManyoftheGovernment’srecentchangeshavebeenannouncedasresponsestobankscandals.Whilewell-intentioned,theseregulationsimposeadditionalcomplianceburdensonallbankinginstitutions.However,theburdenofimplementingandcomplyingwiththesenewandchangedregulationsfallsmostheavilyonsmallerbanks,giventhatthecostsofcompliancearetypicallyfixedandindependentofabank’ssize.Evenwherelargebanksincurhigherabsolutecostsofregulationandotherobligations,itistypicallythecasethatsmallerbanksincurhighercostsrelativetotheirtotalrevenueorassets.Majorbankshaveagreatercapacitytoabsorbtheseregulatorycosts.Indeed,economistsarguethatregulationisoneofthemosteffectivebarrierstoentry,andalsocanbeusedtoincreasetherelativeoperatingcostsofarivalfirm.Exemptingsmallerbanksfromregulationisrarelyasolution.Smallerbanksdonotwanttositoutsidemainstreamregulatoryrules.Thishasimplicationsforcustomerconfidenceandfund-raising.Duallicensingregimesaretypicallynon-competitivelyneutral.Ensuringcompetitiveneutralityistherightpolicysolutiontominimiseregulation.
Recommendation: E. That before any new regulations are introduced, greater consideration should be given to the impacts on smaller banks.
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CONCLUSIONThebankingsystemhasgenerallyservedthemarketwellovertime.Whileothersectorsofthefinancialsystem,suchassuperannuationfunds,mayplayanincreasedroleintheprovisionofcapitaltotheeconomyinthefuture,thebankingsystemwillcontinuetoplayasignificantandcriticalroleintheintermediationofcapitalandprovisionofefficientpaymentsystems.Regionalbankswillalsocontinuetocontributetothisprocessbyprovidingcompetitivetensioninthedeliveryofqualityproductsandservicestoconsumers,smallbusiness,andregionalcommunities.TheGFCandincreasingprevalenceofindustryissues(poorcustomeroutcomes)providethemainbackdroptothePC’sCompetitionInquiry.ThebigfourbankshaveemergedfromtheGFCwithlargerbalancesheetsandevengreatermarketdominance.Theincreaseinindustryissueshasnottranspiredintoalossofmarketshareforthebigfourbanks.Thebigfourarenowsodominant,thevitalconnectionbetweencustomersatisfactionandmarketshareperformancehasbroken.TheviewoftheregionalbanksisthattherestorationofthislinkiscriticalforAustralianconsumersandthelong-termcontributionofthebankingsystem.Ensuringgenuinecompetitiveneutralityisthekeystrategyinthistask.Byadoptingtherecommendationsinthisreport,regionalbanksbelievefurtherheadwaycanbemadeinimprovingthebankingsystem,restoringcompetitiveneutrality,andsecuringoutcomesforconsumers.
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66 LEVELLING THE PLAYING FIELD IN RETAIL BANKING
REFERENCESAreeda,P.E.,Solow,J.L.,&Hovenkamp,H.(2002).Antitrust Law: An Analysis of Antitrust Principles and Their Application, Volume IIA Second Edition.NewYork:AspenLaw&Business.
ASIC.(March2017).Review of mortgage broker remuneration.Sydney:ASIC.Retrievedfromhttp:// download.asic.gov.au/media/4213629/rep516-published-16-3-2017-1.pdf
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APPENDIX 1: TERMS OF REFERENCECompetition in the Australian Financial SystemTerms of referenceI,ScottMorrison,Treasurer,pursuanttoParts2and3oftheProductivityCommissionAct1998,herebyrequestthattheProductivityCommission(theCommission)undertakeaninquiryintocompetitioninAustralia’sfinancialsystem.
BackgroundThefinancialsystemundertakesanumberofkeyfunctionsbothdirectlyforhouseholdsandinsupportoftheoperationofthewholeeconomy.Theseincludeallocatingcapital,aidingthesmoothingofconsumption,helpingmanagerisks,andprovidingpaymentservices.ThefinancialsectoritselfisthelargestsectorinAustralia-accountingforaround10percentofoureconomy.The2014FinancialSystemInquiry(theMurrayInquiry)consideredthatalthoughcompetitiongenerallyappearsadequate,thehighconcentrationanddegreeofverticalintegrationinsomepartsoftheAustralianfinancialsystemhasthepotentialtolimitthebenefitsofcompetitioninthefutureand should be proactively monitored over time.TheMurrayInquiryrecommendedthattheGovernmentstrengthenthefocusoncompetitioninthefinancialsystem,includingbyreviewingthestateofcompetitioninthesectoreverythreeyears.Inresponse,theGovernmentagreedtoimplementperiodicreviewsofcompetitioninthefinancialsystem,andtotaskingtheProductivityCommissionin2017.FollowingotherrecommendationsoftheMurrayInquiry,theGovernmenthasalreadycommissionedotherProductivityCommissionworkofdirectrelevancetofurtheringcompetitioninthefinancialsystem,whichthisinquiryisintendedtobuildonandcomplement.Thatworkconcernsdataavailabilityanduse,andtheefficiencyandcompetitivenessofthesuperannuationsystem.
Scope of the InquiryTheCommissionistoreviewcompetitioninAustralia’sfinancialsystemwithaviewtoimprovingconsumeroutcomes,theproductivityandinternationalcompetitivenessofthefinancialsystemandeconomymorebroadly,andsupportingongoingfinancialsysteminnovation,whilebalancingfinancialstabilityobjectives.WithoutlimitingrelatedmattersonwhichtheCommissionmayreport,itsreporttotheGovernmentshould:
1. considerthelevelofcontestabilityandconcentrationinkeysegmentsofthefinancialsystem(includingthedegreeofverticalandhorizontalintegration,andtherelatedbusinessmodelsofmajorfirms),anditsimplicationsforcompetitionandconsumeroutcomes
2. examinethedegreeandnatureofcompetitionintheprovisionofpersonaldepositaccountsandmortgagesforhouseholdsandofcreditandfinancialservicesforsmallandmediumsizedenterprises
3. comparethecompetitivenessandproductivityofAustralia’sfinancialsystem,andconsequentconsumeroutcomes,withthatofcomparablecountries
4. examinebarrierstoandenablersofinnovationandcompetitioninthesystem,includingpolicyandregulation
5. prioritiseanypotentialpolicychangeswithreferencetoexistingpro-competitionpoliciestowhichtheGovernmentisalreadycommittedorconsideringinlightofotherinquiries.
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TheCommissionshouldhaveregardtotheGovernment’sexistingwide-rangingfinancialsystemreformagendaanditsaimsto:
• strengthentheresilienceofthefinancialsystem• improvetheefficiencyofthesuperannuationsystem• stimulateinnovationinthefinancialsystem• supportconsumersoffinancialproductsbeingtreatedfairly• strengthenregulatorcapabilitiesandaccountability.
ProcessTheCommissionwillcommencetheinquiryon1July2017.TheCommissionshouldundertakeappropriatepublicconsultationprocesses,includingholdinghearingsandinvitingpublicsubmissions.Itshouldconsultwidely,includingwithconsumers,financialinstitutionsandtheagenciesthatregulatethefinancialsystem,inparticulartheAustralianPrudentialRegulationAuthority,theAustralianSecuritiesandInvestmentsCommissionandtheReserveBankofAustralia.TheGovernmenthasaskedtheregulatorstoconsidermakingsubmissionsonmattersthatrelatetotheirareasofexpertise.ThefinalreportshouldbeprovidedtotheGovernmentwithin12monthsofcommencement.
Scott Morrison, Treasurer
[Received8May2017]