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Rates hikes and ‘significant power’ of majors under scrutiny

A parliamentary report of the major banks has labelled the big four an “oligopoly” and highlighted the “surprising” lack of regulation that has allowed the majors to harness significant pricing power in the residential mortgage market.

In its first report, tabled yesterday, the standing committee on economics warned that oligopolies are problematic when they are able to use pricing power to the detriment of consumers.

“Australia’s banking system is such an oligopoly,” the report said. “Australia’s four major banks have significant pricing power, higher than average returns on equity and large market shares.”

The report noted that the majors increased their oligopolistic powers after the GFC when they purchased a number of their smaller competitors, such as St. George Bank and Bankwest.

In addition, the committee noted the post-GFC collapse in securitisation markets, which had previously allowed the non-majors and non-bank competitors to access cheap wholesale funding.

“The committee finds it very surprising that no Australian government has completed a wholesale review of competition in the banking sector in recent times,” the report said.

“More surprising, however, is that despite the Australian Competition and Consumer Commission’s (ACCC’s) clear concerns about the level of banking competition, it has acknowledged not closely monitoring the sector because ‘the RBA, APRA and ASIC are ... observing the banks.’

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“None of these regulators, however, have a clear mandate to promote competition in the financial sector. The ACCC does.

"This means that no regulatory agency is regularly considering the level of competition in Australia’s banking sector and whether change is required.”

To create this accountability, the committee recommends that the ACCC (or the proposed Australian Council for Competition Policy) establish a small team dedicated to the continual monitoring of competition in the banking sector.

“This team should make recommendations to improve competition in the banking sector to the Treasurer every six months,” the report noted.

Pricing power and rate hikes

The report highlighted the out-of-cycle rate hikes of the big four banks in October last year, which the majors attributed to an APRA requirement to hold additional capital.

“However, the magnitude of the interest rate increases in October 2015 (between 15 and 20 basis points for each of the major banks) indicates that the cost of higher capital requirements was borne largely by mortgage holders as opposed to shareholders,” the committee said.

“The major banks’ pricing power is also observable in the fact that they closely follow one another’s price changes, rather than attempting to increase their market share.”

The committee observed that since 2000, at least one of the major banks has increased their SVR out-of-cycle nine times.

“On five of these occasions, each of the other major banks has followed in the same month,” the report said.

More to come.

[Related: Major bank looking at tracker mortgages]

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