Market falls captive to the banks
The Age
Wednesday March 17, 2010
BANK bashing has long been a national pastime, not that they feel much pain. Public protest hasn't stopped the big banks fattening up while everyone else tightened belts during the financial crisis. Of course, it's better to have healthy banks than the alternative, but their dominance has reached a point that worries policymakers.Treasury secretary Ken Henry notes that the banks have been able to defy government warnings not to exceed rate increases by the Reserve Bank because takeovers of smaller rivals and the withdrawal of foreign banks slashed competition in the home mortgage, small business, credit card and deposit markets. BankWest, St George, RAMS, Wizard, Aussie Home Loans and Challenger were among those gobbled up. The big banks' share of the mortgage market grew from about 60 per cent to 82 per cent even as they widened their lending margins 0.20 to 0.25 points. At the peak of the crisis, the big four wrote 93 per cent of new home loans, using the federal government guarantee to obtain funds at AAA rates.Smaller institutions couldn't afford the fee payable for the guarantee to compensate for their lower credit rating. That has left them largely reliant on deposits for funding, but even here the banks outmuscled smaller rivals by offering high interest rates. That accelerated the rush of depositors to the big four. Despite the government guarantee applying to all deposit-taking institutions, only one in eight Australians believes money in building societies and credit unions is very secure, according to financial researcher CoreData. One in two thinks their money is very secure in the big banks.Lack of competition is not only a problem for individual Australians but for state governments seeking finance for infrastructure projects. (That is one reason that the lending guarantee extended to the states last March will continue after the bank guarantee expires this month.) Banks have charged states up to 2 percentage points more for funding than it cost them to raise the funds.Legislation may be needed to strengthen the regulation of competition or to stimulate competition by creating a market in bonds backed by AAA-rated residential mortgages. This is an idea, believed to be winning favour in Treasury, that would help revitalise the securitisation markets in which smaller lenders obtain most of their funds. Under current conditions, the federal government can do little more than lamely urge banks to behave. Something more must be done if political leaders are not to be exposed as paying only lip service to competition policy.
© 2010 The Age
