Regions need competitive banking market

21 May 2009

The mutual banking sector is calling on the Federal Government to act to preserve competition in retail banking, particularly in regional Australia where credit unions and mutual building societies have such an important role.

In a submission to a Parliamentary inquiry, Abacus – Australian Mutuals says there is an urgent need to refine the Government’s Guarantee Scheme for Large Deposits and Wholesale Funding.

“We strongly support continuation of the existing guarantee for deposits of up to $1 million but some changes are needed to the guarantee arrangements applying to large deposits and wholesale funding,” said Louise Petschler, Abacus CEO.

“Authorised Deposit-taking Institutions – banks, building societies and credit unions – are the core of the financial system and are trusted with the household savings, wages, welfare payments and pensions of Australians.

“While the Government’s response to the global financial crisis has delivered confidence and stability, it is now time to act against the strong bias that favours the big four banks.

“An unintended consequence of the guarantee arrangements is a strengthening of the major banks’ market power.

“Credit unions and mutual building societies must pay 1.5% to obtain the guarantee while major banks pay 0.7% at a time when the official cash rate is 3%. Official rates have plunged by 4.25% in seven months so the fee structure is clearly anti-competitive.

“Access to wholesale funding will assist mutual ADIs to put competitive pressure on major banks in the interests of Australian households and small businesses.

“Major banks are responsible for the vast majority of $104.1 billion in funds raised using the guarantee of wholesale funding. The big banks have been able to obtain large amounts of funding, at longer terms, thanks to the guarantee. Mutual ADIs to date have not raised any guaranteed wholesale funds.

“The Government should revisit the Scheme and introduce a flat fee or at least a flatter fee structure.

“Preserving competition and choice in retail banking is important for all Australians, but it is critical for consumers and small businesses in regional Australia because their banking needs have never been adequately met by the major banks. People in regional Australia have not forgotten the withdrawal of major banks from regional Australia and the wave of branch closures in country towns.

“Our submission to the House of Representatives inquiry into the impact of the global financial crisis on regional Australia also recommends action to resuscitate the mortgage securitisation market.

“We want the Government to positively consider lessons from schemes like the Canada Mortgage Bond scheme to underpin competition and choice in the home loan market and drive down mortgage interest rates.

“Canada Mortgage Bonds are bonds issued by a special purpose trust and guaranteed by a Canadian Government agency. The scheme was established to provide Canada's mortgage industry with an alternative source of mortgage funding, and to help ensure Canadians have access to affordable mortgage financing.

“An independent evaluation of the scheme found that it has played a stabilising role in Canadian mortgage markets since late 2007 by providing a reliable funding source, and this has been particularly important for smaller lenders, including credit unions.

“Like Australia, Canada has a strong credit union sector in a banking market dominated by a few big banks – so I think there is a lot to learn from Canada about promoting competition in home lending,” Petschler said.

Abacus’ submission is available to download below.

For more information, contact:

 download pdf version here 31.14 Kb

 submission 660.60 Kb