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banking reform? « Previous | |Next »
December 14, 2010

Swan's reforms to cut down the power of the banking cartel and increase competition in the finance industry was a fizzer. Pretty much in line with the standard talking up reform and not much action. Remember Swan's earlier promise that customers can "now vote with their feet"? Well, the market as it exists now doesn't work that way.


The reforms include a permanent deposit guarantee scheme, the scrapping of a ban on selling covered bonds commitments to outlaw mortgage exit fees, allowing mutuals to become banks more quickly, extending the deposit guarantee indefinitely, and making "price signalling" of interest rate hikes illegal.

Swan’s package isn’t radical. It is more tinkering on the edges than landscape altering and, indeed, probably does more for the major banks than it does for their competitors.The cartel still rules and they treat us consumers badly, but we accept that treatment because we feel that the banks offer us security.

The result, as Tim Colebatch says in The Age is that:

If you're paying too much for your mortgage, you'd better find your own solution: tightening your belt to pay down your debt, refinancing with a credit union, whatever. Best of luck.

Interest rates will rise next year because our mining investment boom will threaten to overheat the economy. So if you are already with a credit union then it is belt tightening, whilst the banks use their cartel power to increase their profit margins and make larger profits. It is more higher fees and charges for consumers.

Talking of the fifth pillar as competition is a misnomer. As Coelbatch observes the four too-big-to-fail banks now hold 80 per cent of all loans. The other banks have 17 per cent, and all credit unions and building societies, just 3 per cent. Sadly, the Rudd/Gillard Government and the competition watchdog allowed one of the big four to swallow up the next biggest bank: first, the State Bank of Victoria, then the Bank of Melbourne, then St George. The result is a cartel that, by and large, does not compete on price.

Hence the need to do something substantial about competition, since the Reserve Bank of Australia is interested in the stability of the financial system not competition.That means supporting the market power of the major banks. If it is the cost of funding that is the main barrier to more serious competition in banking, then little was done by Swan to ease funding pressures for smaller lenders. Little was done to create a fifth banking pillar that would be able to muscle up to Westpac, Commonwealth Bank, ANZ Bank and National Australia Bank.

If Swan wants to build a ‘fifth pillar’’ based on credit unions and building societies, then he has yet to explain how a sector with $76 billion of assets and without any significant improvement to their capacity to raise funds competitively is going to be able to discipline the four majors, with their $2 trillion-plus of domestic assets. They aren't.

| Posted by Gary Sauer-Thompson at 7:14 AM | | Comments (1)


Swan's allowing of "covered bonds" and extra Govt. buying of RMBS sounds awfully pre-GFC to me. Maybe somebody should brief him on what happened with CDOs.