HomeView 2017 Media ReleasesUnfair rules harm banking competition

More proof has emerged that different rules on mortgages for large and small banking institutions are distorting competition.

More proof has emerged that different rules on mortgages for large and small banking institutions are distorting competition.

A new paper from the Bank of England[1] about bank capital requirements confirms the Financial System Inquiry’s (FSI) fears about allowing large banks to use a much smaller portion of equity funding for mortgages than smaller banking institutions.

“The BoE says the different capital requirements give large banks ‘an economically significant price advantage’ over their smaller competitors for the lowest risk mortgages,” COBA CEO Mark Degotardi said.

“The BoE research proves beyond doubt the unfair advantage big banks have over their smaller competitors, particularly for the lowest risk mortgages.

“This is bad for competition and bad for risk management. The FSI warned about this problem more than two years ago.

“We urge APRA to take action to further narrow the gap in capital requirements for mortgages. APRA has already taken a very welcome ‘interim’ step in this direction but this BoE paper underlines the need for further action.

“APRA increased the average risk weight for major bank mortgages to 25% last year but major banks are still able to apply risk weights of 5% to the lowest risk loans whereas smaller banking institutions have a minimum risk weight of 35%.

“The difference between 5% and 35% is not merely a gap, it’s a chasm,” Mr Degotardi said.

The FSI found that because equity is a more expensive funding source than debt, allowing the major banks to use a much smaller proportion of equity funding for mortgages translates into a funding cost advantage for the major banks’ mortgage businesses.

‘Given that mortgages make up a significant portion of the assets of almost all Australian ADIs, competitive distortions in this area could have a large effect on their relative competitiveness. This may include inducing smaller ADIs to focus on higher-risk borrowers. Restricting the relative competitiveness of smaller ADIs will harm competition in the long run.’

Media Release

[1] http://www.bankofengland.co.uk/research/Pages/workingpapers/2017/swp639.aspx

For more information please contact:

Daniel McDougall, Senior Manager – Media and Communication

02 8035 8444 or 0407 637 541, This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Customer Owned Banking Association is the industry body for credit unions, building societies, mutual banks and friendly societies.  See www.customerownedbanking.asn.au

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