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Report finds action needed to promote competition in banking

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Changes to the regulatory framework for home lending are needed to promote competition in banking, according to an independent report commissioned by the Customer Owned Banking Association.


The report Reconciling Prudential Regulation with Competition finds that a more competitive banking market will improve efficiency and innovation and will benefit consumers by improving choice, lowering borrowing rates and raising deposit rates.


The report finds that warnings by the 2014 Financial System Inquiry about risks to competition in banking have come true and that the prudential regulator APRA has put smaller banking institutions at a major competitive disadvantage with its rules on regulatory capital for home loans.


APRA is due shortly to release a draft revised capital framework that the report says will have a profound impact on the level of competition in banking, especially in relation to the largest lending market: lending for residential mortgages.


The report proposes measures that could help ensure that prudential regulation “does not continue to operate in such a manner as to stifle competition in the Australian banking system”, including:

  • Ensuring competition considerations are given due deliberation in prudential regulatory policy decisions by creating a statutory secondary competition objective for APRA
  • Compel banks using the ‘self-regulation’ internal ratings-based capital framework to hold more capital to strengthen stability and ensure the benefits achieved from injecting greater competition into the banking system can be realised, and
  • Increase granularity for risk weights for banks using the standardised approach to improve competition in home lending.

Customer Owned Banking Association CEO Michael Lawrence said the report is timely given the acute need for a competitive and efficient home lending market.


“Following the Financial Services Royal Commission there’s a renewed focus on how regulators and government can improve competition in banking and ensure major banks are accountable without reducing financial stability.


“The report shows that, due to APRA’s framework, the major banks enjoy a funding cost advantage in excess of $1,000 annually on a residential mortgage of $400 000.


“The rules on risk weights mean there is too large a gap between the amount of capital that smaller banks must hold compared to the major banks.


“The report says APRA should be looking to close the gap in risk weights and it should ensure that it does so in a way that prevents the major banks ‘cream skimming’ the lowest risk home loans.”


Reconciling Prudential Regulation with Competition was produced by Pegasus Economics for COBA.


Key facts from the report can be read here.


The full report can be read here.

A PDF of the media release is available here.

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