The major banks were able to set their own limits on their risk capital holdings as a result of over-zealous deregulation during the 1990s and used the power to buy up competitors, the financial services royal commission has heard.
Robert Johanson, the chair of Bendigo and Adelaide Bank, told the commission that “large sophisticated banks that could convince the regulator they had the systems to cope with this, were basically able to set their own capital requirements”.
That meant the banks could boost their support for the housing market after the global financial crisis struck, with “central banks and governments effectively flooding the finance system with cheap money”.
“A lot of that funding was pushed into … housing … to keep economic activity up despite the crisis,” Mr Johanson said.
Government support through guaranteeing deposits and effectively guaranteeing their international borrowings gave the big four banks huge fire power, which they used to concentrate the industry by buying minor banks and mortgage-broking companies.
“Mortgage brokers, which had provided a disruptive, competitive element in the industry, mostly ended up getting bought by the major banks. And the funding available to them then got funded through government guaranteed wholesale borrowing,” Mr Johanson said.
During the GFC, Commonwealth bought BankWest and Westpac bought St George. Bendigo also bought Adelaide Bank but Mr Johanson said it remained a relatively small operator because of the consolidation of the big four.
“In Australia … from our perspective, we basically have a two-tier banking system,” he said.
“We have a group of four major banks that dominate the market and have the benefit of that advance accreditation system that I described … even though the regulator has pulled back on the extremes.”
Mr Johanson told the commission that Bendigo and Adelaide had a relatively low reliance on mortgage brokers who supplied only about 7 per cent of its mortgage loan business. But the bank appears to have a range of other agents who provide a similar function.
“Almost a third of the loans last year came to us through our partners, local communities who own their own distribution,” he said.
“We also get about a fifth of our loans from what are called mortgage managers who aren’t brokers, in the sense of simply writing loans with commission, upfront and trail. But we effectively provide them a cost of funds, a line of funds and they then go and write mortgages with customers.”
Mr Johanson said brokers and other intermediaries provided 55 per cent to 60 per cent of the banking mortgage business, according to the Productivity Commission, which considers them “part of the establishment”.
Counsel assisting Rowena Orr QC put it to Mr Johanson that the Productivity Commission and others had recommended mortgage brokers be paid a flat fee rather than the current system of upfront and trailing commissions based on the size of the loan. But he balked at that.
“It’s crucial, I think, that we don’t interfere with the ability of customers to choose how they want to interact with this system – that we don’t end up with a fee structure that impedes different ways of providing that access to customers, the customers choose, and we don’t interfere with other potential disruptive processes,” Mr Johanson said.
When pushed on the issue, he said any reforms to broker and other intermediary remuneration should ensure “that the solutions we come up with don’t interfere with the ability of other [broker like] organisations to provide that service”.