Banking on a Fairer System for All, Daily Telegraph, 16 January 2017
Seventy-one years ago, economist John Maynard Keynes quipped ‘if you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy’.
It’s a cracker line – but it isn’t true anymore. In today’s money, Keynes’s million pound debt would be about 1/2000th of the loan book for one of the Australian big four banks. In the ‘too big to fail’ era, banks are rarely at their customers’ mercy.
Banking is one of Australia’s most concentrated industries. A new analysis from the Australian Securities and Investments Commission looks at the market share of our largest four banks: the Commonwealth Bank, Westpac, ANZ and NAB. It finds that they control 77 per cent of all banking assets, 80 per cent of mortgages, 75 per cent of credit card transactions and 80 per cent of household deposits.
Australia’s banks are big by international standards. Our banking sector is more than twice as concentrated as that of the United States, and more concentrated than banking in the major advanced economies.
Australian banking is becoming more concentrated. In 2007 the big four controlled 65 per cent of Australia’s banking assets. Today they control 77 per cent. They are also expanding into other markets such as funds management, financial advice, wealth management and mortgage broking.
But wait, I hear you cry, increased concentration doesn’t necessarily mean a lack of competition. True, but a highly competitive environment would be likely to drive down interest rate margins, bank profitability and returns on equity. By contrast, Australia’s banks enjoy a higher return on equity than in the major advanced economies. They also enjoy higher interest rate margins and are much more profitable than in almost all of the major advanced economies, with the exception of the United States.
More wonkish metrics point in a similar direction. The World Bank calculates ‘Lerner Indexes’, ‘H-Statistics’ and ‘Boone Indicators’ – which sound like cricket statistics, but are in fact all fancy ways of figuring out how much competition there is in a nation’s banking sector. On each of these measures, Australia ranks poorly compared to the major advanced economies.
But wait, I hear you cry again, aren’t we are always told that a concentrated banking sector is more resilient to financial shocks? As former Reserve Bank Governor Glenn Stevens put it, ‘if my choice is between banks with good profits and banks with no profits then I choose the former every time’. Yet when the OECD – an advanced nation thinktank – looked at the literature, it found no clear evidence that concentrated banking made the economy more stable.
So what could be tweaked to boost competition in Australia’s banking sector? One modest answer is to encourage the growth of cooperative and mutual banking. Last month, I announced a suite of Labor reforms to facilitate fairer access to capital, allowing credit unions and building societies to compete more effectively.
This complements a Labor tradition of common sense reforms in boosting banking competition, including the ‘tick and flick’ switching service under the Gillard Government which has made it easier for customers to switch banks by authorising their new financial institution to do all the paperwork.
It’s not all on government, either. ‘Tracker mortgages’ are an opportunity for banks to boost competition in their own industry. A tracker mortgage is a type of variable rate mortgage where the interest rate is fixed at a set percentage point above a benchmark rate. Auswide Bank has a tracker mortgage which tracks the Reserve Bank’s cash rate by a margin of 2.49 per cent. The Australian Securities and Investments Commission has pointed out that the banks cost of funds follows the cash rate very closely. The Commission’s strong advocacy for tracker mortgages makes this an idea worth considering.
But most importantly, competition is nothing without consumer protection. Firms don’t bother competing with each other when they can simply lie to win customers. Confidence and trust in Australia’s financial services industry has taken a hit after an ongoing range of scandals and high profile consumer rip-offs in recent years. As Bill Shorten, Chris Bowen and Katy Gallagher have made clear, a Royal Commission into the financial system is a no-brainer. A serious problem in a serious industry requires a serious response. It’s time for the Government to swallow its pride and put the interests of the Australian people and the Australian economy first.
Andrew Leigh is the Shadow Assistant Treasurer and the Shadow Minister for Competition and Productivity. This opinion piece was first published in the Daily Telegraph on Monday, 16 January 2017.