Balancing competition and stability is the holy grail of Australian banking as APRA begins to implement the Murray Inquiry’s recommendations.
That’s the message from APRA chairman Wayne Byers in a speech this week. Byers said that there are a number of “desirable features of a financial system”, competition and stability “are the ones that have had most attention in the post-crisis period, and are often seen as jostling for primacy in the current policy debate.”
Competition is front and centre of the debate because the major banks have been able to significantly increase its mortgage lending market share over smaller competitors in the aftermath of the GFC.
The level of concentration also increased since then as the majors benefited from too-big-too-fail status and sought to exploit the capital advantage they hold over the rest of the industry by way of their ‘advanced’ status for credit risk measurement to materially increase market share in home lending.
The change in home lending share owned by the majors increased between 2007 and 2014 from 55% to 75%, according to data from Luke Andersen, senior analyst at mortgage book risk management company Morgij Analytics. Andersen told Business Insider that while all of the Big Four increased share, the big movers were Westpac and the CBA, who now account for 22% and 24% of total mortgage market lending.
“Of course some of that increase is due to Westpac’s acquisition of St George and the CBA’s purchase of Bankwest,” Anderson explained, but in general the Majors have been outbidding their smaller rivals for loans over recent years the data shows.
The question of how they are doing that depends on who you ask.
Some say the competitive advantage equates to a pricing advantage because the majors – and Macquarie – are required to hold less capital against mortgage loans than regional banks or mutuals. That’s because they hold “advanced” accreditation under Basel III rules, which allow them to calculate their own risk on the loans and allocate capital against that. In contrast, the regionals and customer-owned sector are on a “standard” set of risk weights that are significantly higher than the levels calculated by the majors.
The problem with that, according to APRA’s Wayne Byers, can be felt in the stability of the banking system should the economy and the system fall on hard times.
Addressing push back from the big banks to the Murray Inquiry’s idea that a minimum risk weight be applied to mortgage lending for banks who hold advanced status, Byers said that:
“The benefits of financial stability are often expressed in terms of the costs of not having it: for example, the higher cost of financing investment, and the disruption to activity in the real economy, that arise from uncertainty and volatility. The financial crisis showed these costs can be deeply damaging, and persist much longer than the crisis that produced them. As a result, policymakers have rebuilt large parts of the regulatory framework in an effort to deliver a more stable financial system.”
That’s what APRA and the Murray Inquiry are trying to do.
But balancing this is not easy and while Byers says that competition can bring lower prices and great choice, as well as encouraging innovation and efficiency, you can still have too much stability and competition he argues:
“Of course, it’s possible to have too much of both. To borrow a phrase, we don’t want ‘the stability of a graveyard’. But we have all seen instances of excessive, or reckless, competition too. Eliminating the excess, and finding the optimum level of both, is a matter of careful balance. And, if we get the balance right, they will be mutually reinforcing: competition will support stability, and stability will support a competitive environment.”
It’s a big ask, but on a global scale Wayne Byers is probably the most likely regulator to be able to achieve this balance.
Then again, finding the holy grail might actually be easier.
DISCLOSURE: Greg McKenna is a Board member of Police Bank, a customer-owned bank, and a consultant to MARQ Services, a business of Morgij Analytics.