Big 4 setting 10 bps cap on pricing competition

Bendigo and Adelaide Bank’s managing director and CEO, Marnie Baker, has told the House of Representatives standing committee on economics that existing regulatory frameworks imposed on ADIs have thwarted pricing competition in the home loan market.

Committee member and Liberal MP Craig Kelly asked Ms Baker to weigh Bendigo’s home loan offering against that of the big four banks.

“If a customer was looking for a loan and they’re shopping between [Bendigo] and the four major banks, [how] would you stack up?” he asked.

In response, Ms Baker acknowledged a “pricing differential” between the products offered by Bendigo and those offered by the big four but attributed it to an uneven regulatory landscape that restricts access to capital for smaller lenders.

“This comes back to a 'too big to fail' [scenario] and it also comes back to a difference between the regulatory requirements that are imposed on internally rated (IRB) banks [and] those that aren’t,” she said.

“That absolutely flows through to pricing.”

When asked how the bank attracts home loan customers, Ms Baker said the bank seeks to distinguish itself from competitors through its service and value proposition.

However, echoing remarks made by the head of Macquarie Group’s Banking and Financial Services (BFS) division, Greg Ward, the Bendigo CEO conceded that if the bank’s mortgage rates were to exceed a margin of 10 bps above prices set by the major banks, it would be putting itself “out of the market”.

According to Ms Baker, current regulatory arrangements enable the big four banks to dictate pricing behaviour in the broader market.  

“The major banks, the fact that they actually do account for over 80 per cent of market share, are the price makers,” she said.

Such concerns about the regulatory landscape have been repeatedly raised by smaller players in the banking sector.

Earlier this year, the Customer Owned Banking Association released a report, which found that changes to the regulatory capital framework have undermined competition in the mortgage market.  

According to the report, the Australian Prudential Regulation Authority (APRA) did not give enough credence to competition risks when applying the IRB method for calculating risk weights provided for under Basel II – a banking regulations framework designed to promote financial stability.

The report found that under Basel II, credit and operating risk weights determined under the standard method were “much higher” than those under the IRB method used by the major banks.

Research from the Reserve Bank of Australia was cited, in which the central bank found that at the end of June 2015, the average risk weight of residential mortgage exposures using the IRB method was 17 per cent, compared to 40 per cent using the standardised approach used by smaller lenders.

The report noted that as a result of the disparity, higher costs were incurred by lenders using the standard method, which influenced the pricing of lending products and, in turn, reduced competitiveness with major banks.

In October, the Australian Competition and Consumer Commission also announced the launch of its home loan price inquiry, which will review pricing behaviour from 1 January 2019 and consumer decision-making and biases, information used by consumers and the extent to which lenders may contribute to consumers paying more than they need to for home loans.

[Related: Macquarie’s market share propelled by turnaround times]