The much anticipated final report from David Murray’s Financial System Inquiry (FSI) has recommended increasing the mortgage risk weights of the major banks to improve competitive neutrality.
Speaking at a press conference in Sydney yesterday, Mr Murray told journalists that the FSI wants to strengthen competition and innovation in the Australian mortgage market.
“In this area, we have recommended that the IRB [internal ratings-based] risk weights for housing loans should increase closer to the standardised risk weights used by smaller banks,” he said.
“This will strengthen competition in banking.
“There are also recommendations to strengthen the focus of regulators on competition of innovation; lower compliance costs; and remove barriers to online distribution.”
Released yesterday, the final report found that the relative riskiness of mortgages for IRB and standardised banks does not justify one type of institution being required to hold twice as much capital for mortgages as another.
“This conclusion is supported by the findings of APRA’s recent stress test, which found regulatory capital for housing was more sufficient for standardised banks than IRB banks,” the report stated.
“Given that mortgages make up a significant portion of the assets of almost all Australian ADIs, competitive distortions in this area could have a large effect on their relative competitiveness,” it said.
“This may include inducing smaller ADIs to focus on higher-risk borrowers. Restricting the relative competitiveness of smaller ADIs will harm competition in the long run.”
Bank of Queensland chief executive Jon Sutton spoke plainly at the lender’s annual general meeting last month about the “completely inequitable” regulatory regime for mortgage risk weightings that requires smaller banks to hold significantly larger amounts of capital against home loans than the majors are required to.
“What this means is if you or I walked into a major bank branch and asked for a home loan, they would have to put aside on average around $1.50 for every $100 they lend,” he said.
“If BOQ lent you the same $100, we would have to set aside more than double that amount for the same customer, with the same risk profile, purchasing exactly the same property.
“Clearly this gives the major banks huge advantages over the rest of the market.”
Suncorp Bank, ME Bank, BOQ and Bendigo and Adelaide Bank have been urging Mr Murray to acknowledge the issue, and have now welcomed the final report’s recommendations.
John Nesbitt, Suncorp Bank's chief executive, said it is encouraging to see that Mr Murray and the inquiry committee have acknowledged the need for action on competitive neutrality.
“The changes proposed on risk-weighted capital applied to major banks would narrow the gap,” Mr Nesbitt said.
“The report recommends a 25 per cent to 30 per cent average mortgage risk weight be applied for those banks with advanced accreditation.”
ME Bank chief executive Jamie McPhee said regional banks provide a strong competitive pressure in the market and a compelling alternative.
“Levelling the playing field - by removing funding and capital anomalies - will further improve competitive tension to the benefit of consumers,” Mr McPhee said.
BOQ’s Jon Sutton said it is pleasing that the inquiry has acknowledged the competitive gap enjoyed by the majors needs to be closed, adding that he would like to see action taken quickly to address the issue, before the dominance of the big four is further entrenched.
“If that happens, Australian consumers will ultimately be the losers,” he said.
Bendigo and Adelaide Bank chief executive Mike Hirst said the regional banking sector is a critical part of Australia’s banking system.
“The sector offers high levels of customer satisfaction and service, particularly in regional and rural Australia,” he said.
In a combined response to the final report, the regional banks said they look forward to working with the treasurer and government to further explore the recommendations and implement solutions that provide genuine long-term benefits to the Australian economy and consumers.