Appearing before the House of Representatives standing committee on economics, outgoing Suncorp Group banking and wealth CEO David Carter said the regional bank had submitted statements that detail what it calls “inherent disadvantages” built into Australia’s tiered banking system, and their impact on competition and consumers.
“Since the GFC (global financial crisis) the major banks’ market share for mortgages has grown from 75 to 82 per cent,” Mr Carter said in his opening statement to the standing committee.
“Over the same period, we have seen non-bank lenders grow disproportionately fast, accelerating further during the period of macro-prudential controls on investor and interest-only lending, and the out workings of the APRA (Australian Prudential Regulation Authority) targeted review into responsible lending.”
Mr Carter said the simplest way to improve competition between the regional banks and the major banks and non-bank lenders was to address the issue of capital.
“Suncorp is required to hold up to six times more capital on the lowest risk mortgages compared to banks awarded advanced risk management or IRB status,” he said.
“And as best as we can estimate, up to 12 or more times the capital than typically private equity owned non-bank lenders are holding for the same loan.
“Even if our funding costs were the same, even if our regulatory costs and obligations were the same, for any given customer we are currently required to accept a materially lower return on the capital deployed relative to our large non-bank competitors.”
Responding to Mr Carter’s calls to address what he called an “entrenched advantage” held by both the major banks and the non-bank sector, Liberal MP and standing committee chair Tim Wilson observed the fact that Suncorp is required to hold up to six times more capital reflects the pricing, at least in part, of risk, which is either addressed through other forms of regulation or a heightened appetite for risk for the non-bank lenders.
“So, how, if there were to be a change, would you address those issues of risk recognised by an organisation like Suncorp,” Mr Wilson asked Mr Carter.
Mr Carter responded: “Suncorp has spent six or seven years doing all that is required to become an advanced bank, so we have invested significantly in our risk management capability and modelling. Unfortunately, the requirements have continued to move, and we haven’t quite been able to take that accreditation yet.”
“So, you want the risk assessment of an advanced bank without meeting its requirements?” Mr Wilson asked.
“We believe we can meet those requirements,” Mr Carter responded. “However, both APRA and Suncorp have had other things to get done. Additionally, APRA is in the middle of revamping the capital requirements under BASEL III. We’re unable to determine what the implications of that will be for us, so we’ve been unable to say to APRA that we wish to be considered to be advanced.”
“Turning to mortgages in question, for any given borrower the advanced banks can assess the probability of default. That might lead to risk weighting of 6 or 7 per cent. Our minimum risk weight is 35 per cent. That’s where the six times comes from.”
Mr Wilson pointed out this raises serious issues about the risk associated with Suncorp, to which Mr Carter responded this is the minimum risk weighting Suncorp is allowed to take on a home loan, as per current standards.
“We believe there should be less disparity for the lowest risk mortgages between the advanced banks and the standardised banks,” Mr Carter stated.
“That can be achieved in one of two ways. On each incremental loan, if we assume that competition is measured by changes in market share, then we should be talking about the next loan, not the average of the portfolio.
“If for the next loan that comes through our door, we have to hold six times more capital than the bank next door to us, our return is going to be materially lower. It makes it very difficult to offer a lower price.”
Mr Carter also outlined two other issues that he argued must be addressed, including the funding cost advantage given to domestic and international banks deemed “too big to fail”, which he said is even more acute during times of prolonged low interest rates.
He also called for delivering proportionality and consistency in regulatory change and supervision activity, which should reflect the risk to financial system stability of different participants, and reduce regulatory arbitrages between those regulated by APRA and the Australian Securities and Investments Commission (ASIC), and those regulated by ASIC alone.
Mr Carter recently announced he would be stepping down from his role in early 2020 to take on the role of group CEO of Queensland-based monitoring body RACQ.
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Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.