APRA regulation ‘hurting small banks’

The Australian 12:00am September 23, 2017

Michael Roddan

The nation’s smaller banks say they are paying the price for the misdemeanours of Australia’s biggest banks, as the country’s regional banks put on a united front calling for a radical overhaul of financial system regulation.

In a joint submission to the Productivity Commission inquiry into competition in the financial system, a collective of regional lenders has broken ranks with the Australian Bankers Association industry body to argue against current “unfair” capital rules, the funding benefit the too-big-to-fail lenders receive, opaque relationships between major banks and their mortgage broker networks, and prudential limits on loans that “lock in” the dominance of the big four banks.

Commonwealth Bank, Westpac, National Australia Bank and ANZ Banking Group control around 80 per cent of the nation’s home loans, and are overwhelmingly dominant in other financial services such as insurance, financial advice and wealth management.

The Weekend Australian spoke with executives of the regional banks that contributed the submission. They said there was a great deal of common ground within the ABA — which has 25 member banks — but that the smaller lenders needed to put forward arguments for injecting greater competition into the financial system.

“There are a lot of areas of common interest at an ABA level,” Suncorp chief of banking and wealth, David Carter said. “But there are some issues that are specific to smaller banks compared to large ones.”

The Productivity Commission inquiry was recommended by David Murray’s Financial System Inquiry. The regional lenders came together to make a joint submission to that inquiry too.

Recently, smaller banks have been at odds with the ABA over the introduction of the major bank levy by Treasurer Scott Morrison’s federal budget.

The major banks are estimated to get, on average, an 18-basis-point funding advantage on wholesale money markets, given the implicit level of government support in the event of a crisis. The new bank tax recoups about one-third of the subsidy.

In their submission, the region banks have argued the levy hasn’t completely addressed the too-big-to-fail subsidy received by the banks.

“Even though the bank levy went some way to addressing the too-big-to-fail, it still gives the majors an enormous cost competitive advantage over the smaller players,” Bank of Queensland boss Jon Sutton said.

The submission also makes the point that regulatory framework entrenches the advantage larger banks have. For instance, the prudential regulator APRA requires smaller banks to hold more capital against loans than larger banks. Whereas Bank of Queensland must hold 42c against every dollar loaned out, a bank such as Westpac is only required to keep 25c in its reserves. For low-risk borrowers, this could be as low as 5c in the dollar.

Other macro-prudential rules deployed by APRA — such as a 10 per cent growth limit on investor loans and a 30 per cent cap on interest-only lending — also have the unintended consequence of freezing market share where it sits. Those who have the largest loan portfolios have the most freedom when complying with the new rules.

“We have a system that is impeding better customer outcomes,” said AMP Bank chief Sally Bruce. AMP had to briefly freeze any new lending to investors when it breached the cap in 2015.

“While we support the need for APRA to put in place measures to ensure stability and good customer outcomes, there are consequences of these measures that could be better addressed,” she said.

“You can effectively get locked in where you are because no one is able to outgrow the competition.”

Nick Xenophon this week said he would introduce legislation next year to require APRA to closely consider the impact of its actions on competition.

ME Bank boss Jamie McPhee said the banking system had become much more concentrated since the GFC. “Oligopolies tend to erode competition over time,” he said.

“You’re making it difficult to get shifts in market share when the macro-prudential policies are in place.”

The submission also argues smaller banks are bearing the brunt of compliance costs due to supervisory and regulatory reviews in the wake of scandals largely sparked by the major banks.

“We’ve seen a wave of regulation and supervisory activity. It could be fairly argued that is the industry’s doing because we could have behaved better in some things,” Mr Carter said.

“But we feel there’s a disproportionate impact on the smaller lenders. We are dealing with all the same inquiries, all of the same changes, all of the same requests for data and reports that the majors tend to be, but we have a very different resource base,” he said.

Since the financial crisis, nearly 40 industry probes have been launched. Around a dozen are still under way.

“Many of the government’s recent changes have been announced as responses to bank scandals,” the submission said. “However, the burden of implementing and complying with these new and changed regulations falls most heavily on smaller banks.”