May

26

Bank competition, mergers and other fun

May 26, 2009 | 2 Comments | Joshua Gans

ACCC head, Graeme Samuel, has come out swinging on bank competition in the last few days. He is concerned that banking competition may be barely workable with reports that non-bank institutions are hardly active in lending markets and, indeed, of new mortgages, just two banks, Commonwealth and Westpac, have captured 85% of that business. Two years ago the share of the four major banks in home lending was below 75%. This is a worrying turnaround especially given that it is those two banks that were allowed the most significant mergers by the ACCC.

Samuel blamed the bank guarantee. However, that guarantee covers all banks and so it would be surprising that it is contributing to consolidation relative to a situation without any such guarantee. More likely this is the consequence of the drying up of mortgage securitisation leaving deposits virtually the only source of financial institution funding over the past 18 months. The government’s $8 billion injection of funds into securitisation isn’t enough to make a competitive splash when one considers that banks would rather lend for home mortgages than to small to medium enterprises in the current climate.

The operation of the banking sector is not going to be right until we fix the regulatory apparatus surrounding it. There are things the government could do to prepare for that — most notably on the issues of information provision for regulation and also the continuing problem of bank switching costs. A proper review and regulatory redesign is difficult to do in the current climate but at some point a full scale  undertaking is needed. Until then it is difficult to see how we can do anything but accept major bank rule for the time being.


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2 Responses to “Bank competition, mergers and other fun”

  1. Bank competition, mergers and other fun | Lending Central | Your Mortgage News on May 26th, 2009 2:00 pm

    [...] View Article [...]

  2. Graeme Samuel, has come out swinging on bank competition | Real Estate Buzz on May 26th, 2009 3:33 pm

    [...] economics.com.au [...]