Regional banks highlight competitive disadvantages in Financial System Inquiry submission

Regional banks have called on the Financial System Inquiry to address issues that they say have created competitive advantages for the big four banks in home lending and other financial services.

In a joint submission to the inquiry, Bendigo and Adelaide Bank, BOQ, ME Bank and Suncorp Bank said the fall-out from the global financial crisis had favoured the major players.

“The banking landscape is now characterised by a higher degree of market concentration, consolidation and increasing dominance of the large banks relative to other providers,” the banks noted in their submission, which was prepared with the help of Pegasus Economics.

“While smaller banks and others provide customers with real alternatives and choice when it comes to financial services, these smaller participants do so at a distinct competitive disadvantage.”

Over the past few years, the major banks had become more vertically integrate with mortgage brokers and financial advice networks, which the regional banks’ submission claimed provided advantages in distributing home loans and other financial products.

The regional banks recommended the inquiry consider commissioning the Australian Securities and Investments Commission to survey the market to assess whether the major banks’ multi-brand strategies were confusing consumers about ownership.

“If it is found that confusion does exist, then a strong disclosure obligation must be introduced to ensure customers are making informed decisions,” the banks said in their submission.

The regional banks also noted that significant funding and cost advantages were available to the big banks deemed “systemically important” and that new regulatory and prudential requirements cost more, in relative terms, for the regional banks to implement.

They also claimed that asset requirements under the Basel capital adequacy framework made it more profitable for the big banks than for the regional banks to issue home loans.

The four big Australian banks, which had undertaken advanced Basel accreditation, were required to hold on average 1.3 cents of capital against each $1 of mortgage credit, UBS Securities Australia estimated. Banks operating under the standardised accreditation – including the regional participants – must hold up to three times more capital for the same loan.

The difference in capital requirements meant that the implied return on equity for ANZ to supply a home loan (estimated to be around 50 basis points) was 34.92% while the same mortgage delivered Bank of Queensland a return on equity of just 14.17%.

Other submissions to the Financial System Inquiry did not agree that competition in the mortgage market was inadequate.

The Reserve Bank of Australia in its submission said a good deal of focus had already been placed on competition in the mortgage market since the financial crisis and that competition in the market for small business loans was more of a concern.

“The [Reserve] Bank considers that this market should be the focus of inquiries regarding competition in lending, rather than the mortgage market,” it said.

Commonwealth Bank of Australia and ANZ agreed in their separate submissions that the inquiry should focus on improving the depth and liquidity of debt markets, on ensuring regulatory standards were consistent and on improving consumers’ financial literacy.

ANZ said: “An open market should continue to be the primary mechanism for maintaining an efficient, competitive financial system. Improvements to retail bond markets and removal of interest withholding taxes would promote efficient competition.”