More than a month has passed since the big banks earned the ire of consumers and politicians following November’s 25 basis point rise in official interest rates by the Reserve Bank with their own rate hikes of up to 45 basis points.
While the Opposition and the Greens have talked tough on new regulations to crackdown on the big banks, Treasurer Wayne Swan waited until yesterday to release his reform package.
The headline grabber was a ban on exit fees on new mortgages written after July 2011 (although mortgage fees on existing mortgages will remain) and a plan to pump another $4 billion into the residential mortgage backed securities market, which should help improve the pool of credit available to smaller lenders, which should hopefully follow through to SMEs.
That’s Swan’s plan, anyway.
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“Generally making the market more competitive is just as important for someone who has that dream of owning a small business as it is for someone who wants to buy a home.”
But how will the reform package work? And when can businesses expect to see a bit of an improvement in credit conditions?
Time for a SmartCompany Q&A.
I thought this package was mainly for consumers and particularly mortgage holders. Is that right?
Spot on. The real headline grabber – and the thing that will allow Swan to look like a tough guy – is the crackdown on exit fees, which will be abolished on new mortgages from July 2011, which will make it easier to shift from one bank to another to take advantage of competition in the market.
Except if you’re already in a mortgage like 30% of households.
What else is in it for consumers?
A few big promises.
Firstly, the Government will set up a feasibility study, to be run by former RBA head Bernie Fraser, to examine ways to make it easier to shift deposits and mortgages, including the introduction of full account number portability, which is something the Greens have been pushing for. Account portability is something that would really enhance competition, but the banks really dislike the idea.
Secondly, the Government will set up a taskforce with the RBA to examine competition reforms around ATMs, with the central bank to examine whether the $2 ATM fee is fair and reasonable.
There will also be a new regulations to crack down on so-called price signalling by the banks (the process whereby they make public statements about rate rises and effectively warn each other what they are going to do) and new legislation to crack down on “unfair” credit card fees, charges and conditions.
Finally, there are a few good old government information campaigns. All new home loan customers will get a mandatory home loan information sheet, and there will be an information campaign to help consumers understand their rights and obligations.
So there’s a bit of stuff now and a bit of stuff that may happen in the future. Was there something specific for SMEs?
No. Where SMEs are going to benefit is from the measures in this package to boost competition in the banking sector.
And what have we seen there?
The immediate reform is that the Government will pump another $4 billion into the residential mortgage backed securities market to help improve the flow of credit to smaller lenders.
While that money is not earmarked for SMEs specifically, it will help to boost the overall pool of credit, which should eventually flow through to SMEs. That’s the theory, anyway.
What measures are there for smaller lenders?
Swan is intent on building a fifth pillar to rival the big four banks, and sees supporting the mutual sector – credit unions and building societies – as the best way to do this.
To this end, he will encourage the banking regulator, the Australian Prudential Regulation Authority, to fast-track the approval of 20 mutuals that want to call themselves banks.
Further, the mutuals will be at the centre of a Government campaign to give lenders a sort of stamp of approval, the “Government Protected Deposits” symbol, which will hopefully allow the mutuals to raise funding.
Finally, the Government will allow banks, credit unions and building societies to issue covered bonds, which are bonds that are secured (or “covered”) by a pool of assets if the bond issuer becomes insolvent. These bonds are seen as a key method for lenders to harness the huge pools of superannuation funds washing through the Australian financial system, and reduce the reliance of lenders on overseas sources of funding.
Okay, so there’s a lot in the package. But will it improve the level of competition in the banking sector and actually mean funds start flowing to SMEs?
It should, but don’t expect an immediate boost. As Swan said yesterday, there is no “silver bullet” that can immediately fix banking competition – the GFC really changed the sector forever.
The Government clearly needed to do something to invigorate the bond market, and it has tried hard to do that. But while the extra $4 billion for the residential mortgage backed securities market will be immediately welcomed, it will of course be a little while before we actually see smaller lenders issuing covered bonds.
Patience is still very much required.