The House of Representatives Standing Committee on Economics’ report into the banking sector, released last week, focused heavily on endeavouring to make banks more accountable for their actions. And while everyone, bank leaders included, agrees the banks need to do better, the biggest concerns for SMEs remain access to funding and the lack of genuine competition in a market dominated by the big four banks.
The report included two recommendations that focus on improving competition but unfortunately neither went far enough.
The Committee recommended banks be forced to provide open access to customer and small business data by July 2018 so that accounts become more portable and customers can change banks more easily. But account portability is of little value when the big banks all operate much the same way. The main reason SMEs don’t look to change banks is because they think they are all the same.
Australian Securities and Investments Commission (ASIC) chair Greg Medcraft noted: “We are in a market which is, frankly, an oligopoly”; Australian Competition and Consumer Commission (ACCC) chair Rod Sims said: “There seems a lack of very robust competition in banking”.
While just about everyone other than the banks is crying out for greater competition, there hasn’t been much progress to date. It seems no single body is taking responsibility.
The Committee noted that the Reserve Bank is primarily concerned with financial stability; ASIC with ensuring market integrity and protecting consumers the and Australian Prudential Regulation Authority (APRA) is responsible for ensuring the financial soundness of prudentially regulated institutions. But when it comes to competition, the Committee was “very surprised that no Australian government has completed a wholesale review of competition in the banking sector in recent times”.
The Committee is of the view that this responsibility sits with the ACCC and accordingly recommends the ACCC, or alternatively the new Australian Council for Competition Policy, “establish a small team to focus on day-to-day monitoring of competition in the banking sector”.
In addition, the Committee said this team “should make recommendations to the Treasurer every six months to improve competition in the banking sector”. So another committee will be set up to look in to competition. It sounds like an episode from Yes, Minister.
Making it easier for new banks to open
Another recommendation is to review the regulatory barriers to make it easier for new banks to open.
This is encouraging for would-be new banks but competition comes from non-banks too, as we have seen in the emerging fintech lending space. This recommendation should be broadened to also make it easier for non-bank lenders to establish and compete for SME business.
Australia’s political malaise
The Turnbull government seems locked into the parliamentary committee structure but this is far from a harmonious team, with four of the 10 members of the Committee (three from the Australian Labor Party and one from the Greens) highly critical of the process and still calling for a Royal Commission into the banking system.
The ALP’s Matt Thistlethwaite described the hearings as “a stag- managed circus from its beginnings”, noting that it has “achieved nothing but to emphasise the inadequacy of this approach for holding Australia’s major banks to account and identify the significant scope of concerning malpractice which remains to be examined”.
But Labor has offered no suggestions to improve SME access to finance.
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The Greens’s Adam Bandt noted: “This inquiry has generated more questions than answers, reinforcing the need for a wide-ranging Royal Commission”. The Greens also want a 0.20% levy to be applied on institutions with an asset base greater than $100 billion. It’s not clear what the Greens would do with the $7.2 billion this would raise, presumably on an annual basis. The Greens also have nothing specific to offer SMEs.
That bank bashing has become an entrenched national sport is an indictment on us all. It’s a gift that keeps giving to the populist media, alternative governments and minor parties—although it must be said that sometimes the banks are their own worst enemies.
Sadly, given the politicised nature of this parliamentary committee structure and process, it is difficult to envisage how it will lead to any meaningful increase in competition in the foreseeable future.
If the government is to persist with this committee structure it might want to consider a more strategic approach to questioning, with support from people like bankers and barristers who know what questions to ask and how to ask them. In addition, allowing each member just 20 minutes to question each bank chief executive is just not enough time.
Government has a role to play in improving SME access to finance
If we are serious about improving SME access to finance, we need look no further than the UK and the US where governments are actually getting involved.
Central to the UK’s strategy for supporting SMEs is The British Business Bank PLC, a state-owned economic development bank established by the UK government in 2014. Its mission is to make finance markets work better for smaller businesses, allowing those businesses to prosper, grow and build UK economic activity.
The BBB does not lend to SMEs directly, but instead works with over 90 partners such as banks, fintechs, leasing companies, and venture capital funds to increase access to funding, such as by providing part-guarantees for loans. It has provided financial support to 48,000 UK SMEs, totalling GBP7.5 billion ($12.5 billion), and it makes a small profit for the UK taxpayers.
In the US, the Small Business Administration was established in 1953 to grow businesses and create jobs. It offers SMEs a range of financial assistance programs. Like its British counterpart, it does not lend directly to businesses but rather provides guarantee support to a wide range of lenders and it too generates a profit for taxpayers.
More regulation of the big banks is not going to change the culture of the banks or improve competition. The big four have a natural desire to maintain the oligopoly and will continue to resist change that threatens their entrenched and privileged positions.
Initiatives like open access to data are welcome and in time will help. But if our politicians are serious about assisting SMEs they should look at the British Business Bank and the Small Business Administration, which continue to assist SMEs gain access to finance at no cost to the taxpayer. Surely we could do something similar here.