The Government’s bank competition has come out. Exit fees were a little different from what I discussed yesterday — applying only to new loans which means there will be no immediate benefit for current loan holders. But the package did include provision for registry of mortgages. This is a potentially fruitful market design idea that will allow for easy transfer of mortgages — particular of securitised mortgages — between front-end home loan providers.
Anyhow, the package prompted a set of silly statements. In the realm of, if these are your friends … this is the silliest one I read:
Banks say they may have to charge higher interest rates to compensate for the lost revenue if the Federal Government pushes ahead with its plan.
“Another potential outcome is that banks will recover these costs through higher interest rates,” Steve Munchenberg from the Bankers’ Association said.
“These fees do represent legitimate costs and different banks and different lenders will decide differently how to deal with these costs.”
So let’s see if we can understand this: A bank loses a customer. Under the ban, they have bear the exit costs. They decide that because of that they will charge higher interest rates to all their remaining customers!
Doesn’t sound too sustainable to me (at least under some form of bank competition). Now what seems more likely is that there will be higher upfront costs but also, for loans 2011 and beyond, lower interest rates. But here is the thing: if banks can’t rely on a fee to keep customers from leaving, they will have to rely on retaining them with lower interest rates. And if they do that they will not incur any costs associated with exit and won’t have to worry about recovering them. The economics aren’t too hard. So why go out and threaten higher interest rates; signalling a threat that could only be carried out if someone is not working in banking competition?