A lack of competition in the banking system has allowed banks to double their returns on some mortgages, while costing taxpayers up to $500 million a year in increased negative gearing tax write-offs, a new report has revealed.
The draft report, released by the Productivity Commission on Wednesday, shows how “blunt” intervention in the interest-only mortgage market ended up producing “windfall” profits for banks.
The report noted: “The Australian Prudential Regulation Authority’s (APRA’s) actions to slow interest-only lending on residential property in early 2017 resulted in higher interest rates on both new and existing residential investment loans, despite the regulatory objective being to slow new lending.
“This led to a windfall gain for the banking sector. Up to half of this gain is in effect being paid for by taxpayers, as interest on investment loans is tax-deductible.
“The Commission estimates that the cost borne by taxpayers as a result of APRA’s intervention was up to $500 million a year.”
The report added: “The ROE [return on equity] on interest-only investor loans doubled … to reach over 40 per cent after APRA’s 2017 intervention.”
The wide-ranging report highlights a lack of price competition in banking, which effectively means “consumers have lost their market power to shareholders”.
It notes: “Much of what passes for competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and ‘white labels’.”
It notes that due to a lack of price competition, “Australia’s major banks have delivered substantial profits to their shareholders, over and above many other sectors in the economy and in excess of banks in most other developed countries post-GFC.”
The report argues that the ‘four pillars’ model of regulation of the banking industry “is an ad hoc policy that, at best, is now redundant”.
Grattan Institute productivity growth program director Jim Minifie said the report should not be confused with the looming Royal Commission into bank malfeasance.
“This is about the core market function of the banking system, not about mis-selling,” he said.
The Grattan Institute estimated last year that “in the banking sector, dominated by the Big Four, super-normal profits account for 17 percent of total profits“.
Asked if the new report would be a ‘bombshell’ in the current political climate, Mr Minifie said: “Yes, you could put it in that category. It will shake things up.”
Martin North, principal of consultancy Digital Finance Analytics, commented: “The report’s findings are what should have been written by the Financial Services Inquiry led by David Murray in 2014. The core issues it has called out have been crying out to be addressed.”
He added: “Every time we use the banking system it costs us extra – like an extra tax on the entire economy. Look at Commonwealth Bank’s results this week, which show a 10 basis point increase in the bank’s net interest margins.”
Mr North said there was a “significant risk” the contents of the report would be “watered down in the final report – which would be a massive disappointment.”
In the draft report, the Productivity Commission suggests the creation of a “designated competition champion” within either the Australian Competition and Consumer Commission or the Australian Securities and Investments Commission to “hold all parties in the financial system to account on competition”.
The Commission suggested the UK’s Financial Conduct Authority, created after the global financial crisis, as a model for the new competition champion, which it said would provide “important lessons” in how to use “proactive regulation, to achieve both effective competition and consumer protection”.