Bank reform 'should help small players'

The big banks' focus on funding costs deflects from the real competition issues of
being able to raise interest rates at will and record profits, says a competition
expert.
Associate Professor Frank Zumbo also said that banking reform should focus on
supporting a small number of strong non-bank lenders.
Prof Zumbo called on the government to mandate the competition watchdog to monitor
banks as part of its reform package to improve competition in the sector.
The University of NSW School of Business Law competition expert on Monday hosed down
the banks' longstanding argument that higher funding costs were behind their
outsized interest rate hikes, which has tended to dominate the debate over
competition reform.
"Banks want the focus to be on the cost of funding because that deflects on their
ability to push up interest rates at will and deflects from their record profits,"
Prof Zumbo, he said in an interview.
Higher funding costs apply to the whole sector, so all things being equal the
competition issues remain, he said.
"The reality is all the banks and financial institutions are struggling with the
higher funding costs but that should not detract from the fact that we need a more
competitive market."
Prof Zumbo said more competition was needed to put downward pressure on the big
four's revenues from fees and interest income and to squeeze their margins.
"If the banks are able to push up their revenue above their increased cost of
funding, that's where consumers feel the pain," he said.
Prof Zumbo's comments came after Commonwealth Bank of Australia (CBA) lodged a
submission to the Senate Economics Committee's banking competition inquiry.
The submission showed that since the global financial crisis (GFC) CBA's costs had
risen for securing deposits, short and long-term funding, and for hedging foreign
exchange risk.
CBA said in the submission that the domestic banking sector was competitive and its
retail bank net interest margins had fallen since the GFC, while corporate and
business lending margins were at unsustainably low levels prior to the crisis.
"Continued access to funding at reasonable cost remains a fundamental issue facing
all market participants and we encourage the government to continue to consult with
the industry to develop funding solutions that sustain Australia's first-class
banking system," CBA said.
Prof Zumbo said the Australian Bankers' Association and banks had put forward a
flawed argument when saying that the number of players in the sector proved its
competitiveness.
Pre and post-crisis banking mergers caused competition to deteriorate and the best
fifth pillar candidate, St George Bank, to disappear when it was acquired by
Westpac.
The big banks did not have the ability to increase interest rates at will, before St
George, BankWest, Wizard Home Loans, Aussie Home Loans and RAMS Home Loans were
swallowed, he said.
"At this point in time, with that independent competition removed, we're finding the
interest rates pushed up beyond official rate increases and there is very little
downward pressure on interest rates."
Asked if more market participants led to lower lending standards, Prof Zumbo said
the quality of competitors was at issue rather than their number.
"We had Aussie, Wizard and RAMS providing very intense, quality competition on the
banks in circumstances where there was no undermining of lending standards."
Prof Zumbo said he wanted the government to direct the Australian Competition and
Consumer Commission (ACCC) to monitor banks' prices, costs and profits under the
terms of the Trade Practices Act.
A similar direction was made to the ACCC over unleaded petrol, Prof Zumbo said in a
submission lodged with the Senate committee.



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