Customer-owned banking sector at a disadvantage: COBA

A “diverse banking sector” is essential for competition, but regulatory movements to limit investor lending have entrenched the major banks’ dominance, an industry association has said.

In a statement to the Productivity Commission Inquiry into the State of Competition in the Australian Financial System, the Customer Owned Banking Association (COBA) criticised the implicit guarantee provided by taxpayers, and the Australian Prudential Regulation Authority’s (APRA) directive that lenders implement a 10 per cent cap on new investor lending growth.

Mark Degotardi, COBA CEO said: “This unfair funding cost advantage is getting worse, with one of the major credit rating agencies recently increasing the benefit that major banks obtain in terms of a credit rating uplift.

“This advantage is significant and is far higher than the government’s recently announced levy on the five largest banks.”

In May, ratings agency S&P downgraded 23 financial institutions, including three of the country’s largest non-major banks, while affirming the credit ratings on the major banks. The affirmation was a result of S&P’s expectation of “timely financial support from the Australian government if needed.”

The COBA CEO added that APRA’s investor lending cap was a blanket ruling that “entrenched the major banks’ share” while undermining competition.

“Investor lending made up 40 per cent of major banks’ home loan portfolios, almost double the proportion of our sector.”

While expressing support for the regulator’s commitment to promoting sound lending, Mr Degotardi labelled the lending cap as harmful to the customer-owned banking sector’s ability to compete.

“Customer-owned banking institutions are nimble and closer to their customers than their larger competitors but they don’t have the same economies of scale to keep costs down,” he commented.

“The costs of regulatory compliance are more difficult to mitigate and involve basic fixed costs that larger entities can spread over a much larger asset base.”

Calling for a “level playing field,” COBA put to the commission four areas for consideration:

1.       The impact of the implicit guarantee on competition;

2.       The regulatory advantage gained by the largest institutions in APRA’s capital framework;

3.       The need for customer-owned ADIs to be able to raise capital to compete more effectively; and

4.       The need for APRA to be required to consider competition as an explicit ‘secondary objective’ in addition to its primary objectives of financial safety and stability.

“It is critical that competition must be a significant consideration in the determination of the regulatory framework and the process of setting government policy in banking and financial services in Australia,” Mr Degotardi said, adding that boosted competition and financial stability are “complementary aims.”

[Related: APRA’s powers are limited, warns Byres

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Lucy Dean

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