My Musings

December 13, 2010
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Banking reforms and the fifth pillar – what it really means?

Following tireless lobbying by the Australian people (via the news.com.au reader comments section), the government has finally acted on the unscrupulous fat cats in bank land, with Wayne Swan yesterday announcing sweeping, industry transforming reforms aimed at increasing bank competition and establishing a “fifth pillar” of financial service.

Oh wait. No he didn’t.

No, instead of any real, decisive change, the Treasurer has introduced a few soft measures aimed at making it a bit easier for the smaller “second tier” banks to get a leg up into the market, while appeasing the masses by appearing tough on the Big 4 by banning mortgage exit fees from mid next year.

This is classic, all tip and no iceberg policy of pandering to the negative public perception that all banks are evil, while privately applauding their ability to keep the financial system running smoothly through the GFC.

This announcement is basically a resounding vote of confidence for the big banks to continue forward with minimal disruption.

The three key measures announced yesterday include the banning of exit fees on new home loans from July 1 next year, the introduction of covered bonds as a means of facilitating additional funding for smaller banks and the extension of the Commonwealth guarantee on deposits.

Of these, the only real impact to the current Big Bank practice is the goal of increasing competition by removing the customer-borne expense of changing lenders.

Suggesting this only factor holding back competition is the cost involved in moving mortgage provides is laughable.

NAB and ANZ, the smallest of the big lenders, have already removed exit fees across their variable rate products, and it was only ever a matter of time before CBA and Westpac moved in the same fashion.

In fact, it could be argued that this move will do more to hurt the smaller banks that the Treasurer is claiming to want to support, as these second tier lenders are notorious for loading up the back end of the contract with high fees so as to discount the initial costs to the borrower.

Indeed, removing lender flexibility in how they charge across products will force all banks to compete more aggressively on standard variable rates – a game of chicken the big banks are far versed at than their underfunded second tier brethren.

It will be interesting to see how the banks approach this new found ability to aggressively poach customers.

With the retention stick of big exit fees removed, the banks will need to start being a bit cleverer around how they keep hold of their borrowers through those oh-so-important early years. Indeed, there is a good reason why exit fees are charged – it’s very expensive to attract and sign-on new customers, and those costs are not recovered until a couple of years into loan payments.

Banks will need to start thinking more about incentives and loyalty bonuses rather than difficult processes and expensive fees as means of retention.

Yesterday’s announcement has also cemented one additional matter that the media has thus far glossed over.

While the Treasurer has used this opportunity to provide tacit approval to the big banks though his edict of “carry on”, he has also signalled a good-as-gold guarantee the government will not move to block the AXA AMP deal.

Some commentators have been calling for the Treasurer to act against the upcoming landscape defining business merger, citing concerns that Australia will lose a significant foothold into Asia with the sale of AXA’s Asian assets to its parent company AXA SA. But with all the talk around the strengthen of non-bank financial services, and the promised (huge) footprint of a combined AXA/AMP distribution network servicing AMP’s underutilised banking licence, we’re certain to see Swannie’s stamp of approval come 2011.


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