- 20 Feb, 2017

Australian Bank Reforms Announced During Consumer Backlash

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In late January 2017, Australias big four banks announced they were investing in a real-time fund transfers and payment system. These changes occurred as the opposition Labor Party called for a judicial inquiry into the financial lending sector.

To offer a better banking experience, the big four Westpac, Commonwealth, NAB, and ANZ introduced a new system. This procedure has cost the banks around US$754.60 million and will allow for real-time payments when transferring money. Consequently, this action ensures funds are available 24-hours-a-day, seven days a week, instead of them taking up to five business days.

The Australian Banking Association (ABA), which represents the big four also announced that greater financial resources are available for businesses and farmers. Therefore, these new resources make it more simplified for these entities to change banks and accounts when, and, if needed. Furthermore, this change comes after the big four independently raised rates, despite the Reserve Bank leaving rates on hold. Many suggest the introduction of a new system is the banks way of reducing customer concerns over their power abuse.

The Big Fours Control Over Home Loans

Concerns that Australias big four banks control a high share of the home loan sector is statistics based. Seven years ago, these banks had a 65% of the home loan sector; today this share is 80%.

With the big four controlling this large share of lending in Australia, they have enjoyed a record profit for years. Subsequently, these lenders have a significant hold on the mortgage market, which contributes to this level of profit. For instance, in 2015, the big four had a joint profit of $30 billion. NAB profited by $6.26 billion, the ANZ $7.29 billion, the Westpac $7.7 billion, and the Commonwealth $8.75 billion. As a result, these were record profits compared to the years prior. However, 2016 profits were marginally lower at $29.8 billion for the year. Hence, the large market share and concerns over rate fixing have prompted a Senate inquiry into bank performance.

The Senate Inquiry into the Majors

Financial system inquiry will focus on the controls within the lending sector. Smaller lender regulations are also under review as many suggest the gap between lender sizes is widening due to restrictions.

Larger lenders offer competitive discounts and other incentives to customers that many smaller lenders cannot present. So, the market is an uneven playing field that consumer groups say affect a consumers buying decision. Now, these consumer groups are asking for control over big bank power so non-major lenders can be more competitive. Reducing home loan competition is the focus of the Senate inquiry as the $1.2 trillion home loan market is lucrative.

Smaller banks such as the Bendigo and Suncorp argue that competition is difficult between small lenders and the big four. Plus, the big four have a funding advantage of 40 basis points because the Standards and Poor upgraded their credit ratings. Smaller lenders also argue regulatory changes are disproportionate larger banks hold less capital for every dollar lent than smaller counterparts.

Foreign banks are also affecting Australian lending. Since deregulation in the 1980s, domestic assets held by foreign banks rose to $330 billion says the Australian Prudential Regulation Authority (APRA).

There are several suggestions as to how to level the playing field. Ideas include raising deposit levies and introducing tougher laws on advertised rates with the banning of advertising mortgage discounts. Another suggestion is the introduction of a big four tax of up to $1.4 billion. Smaller lenders also want the capital holding to be fairer. Although, critics say these changes are not enough; the big four need to do more. Therefore, hopes hinge on the independent inquiry shedding light on competition levels and offering more insight into solutions.

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