Is the Australian banking system really competitive?

The Reserve Bank of Australia’s Assistant Governor Guy Debelle stated this week that there was enough competition in the Australian mortgage market to limit profit taking by the major banks despite increases in margins for personal and business loans.

It was an interesting comment given that the financial sector today only has four primary players with St George having been swallowed up by Westpac and Bank West being acquired by Commonwealth Bank.  Also, many of the mortgage brokers and smaller lenders have either been absorbed into larger entities or gone out of business with the recent economic woes.

Cash rate vs mortgage rate

Between 2001 and 2007 the gap between the cash rate and standard variable mortgage rate had generally sat at 1.8 basis points.  Since the start of 2008, the gap between the cash rate and the mortgage rate has begun to widen and today the difference sits at 2.8 basis points.

There is no doubt that Australia’s quality  banking system has proven to be one of the world’s best with none of our banks collapsing, property values holding steady and now above their previous peaks and home loan delinquency rates at extremely low levels.

Despite this the banks have implored that funding costs have increased, thus why they can’t pass on all of the cuts to the cash rate which were witnessed during the last 12 months, leading to the widening of the gap between the cash and mortgage rate.  The cash rate futures market yield curve suggests that over the next 18 months official interest rates will increase from their current level (3.5 per cent) to around 5.2 per cent, indicating a likely mortgage rate based on a 2.8 per cent gap of approximately 8.0 per cent.

The big question is will banks pass on the savings when the cost of funding improves?  Or, when funding becomes much easier, will the banks pass on a smaller percentage of any official rate increases?  Only time will tell.

All the while, the Government has provided the banks with guarantees and public institutions such as The Australian Competition and Consumer Commission (ACCC) has sat on the sidelines and allowed competition to dissipate.  I can’t comprehend how a reduction in competition which has clearly happened within the banking sector along with Government Guarantees (tax payer funded) and the fact that banks have widened the gap between the cash rate and mortgage rates suggests a competitive financial marketplace.

Of course it would be an entirely different story if the big four weren’t still recording strong profits.  Although their profits have fallen, Australian banks have certainly not been impacted by the downturn as significantly as the majority of other businesses.

Ultimately, in markets where there is reasonable competition customers should be able to vote with their feet by moving to a competitor.  However, the Big Four banks are essentially offering the same interest rates and similar products, making it difficult for those with a home loan to seek out viable alternatives. 

 Cameron Kusher

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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