Too big to fail not going away
Smaller institutions want the Hockey inquiry to get stuck into competition.
Louise Petschler might be in the business of representing the country’s smaller financial institutions, but she says the issue of what to do with those considered “too big to fail” should be the priority for the government’s inquiry into the financial system.
Ms Petschler, the chief executive of the Customer Owned Banking Association (COBA), which is the industry body for credit unions and building societies, says the dominance of the big four banks is a concentration risk for the financial system that needs to be resolved through government intervention to foster greater competition.
“No one wants to do anything that undermines the stability of the Australian banking system and we recognise that we have a very strong system,” Ms Petschler said. “Our argument is that with some rebalancing and with a recognition of the need for a greater diversity of players and with a regulatory system that encourages that, we can strengthen the stability of the system by reducing our reliance on these four too-big -to-fail institutions.
“The trajectory we are on now takes us to four too-big-to-fail institutions that continue to increase their too-big-to-fail status.”
According to Ms Petschler, Australia’s major banks benefit from an implicit guarantee that the government would step in to bail them out in the event of a crisis because they are too big to fail. She said this guarantee was a major advantage for the big four and allowed them to raise money more cheaply from investors than other institutions.
Regulators have recently announced new rules that will require the big four to keep billions of dollars more in reserve as an added safeguard in recognition of their position as “domestic systemically important banks “.
But Ms Petschler said this measure was not enough. “The big picture is that we have an increasingly concentrated banking market. We have seen our major four institutions get to a point where they have got a real stranglehold in terms of the market,” she said.
“That is not to criticise the four major banks. It is to say that if we are serious about having a more competitive banking system, then this is the appropriate point to take stock and consider whether the settings we have are encouraging diversity in terms of retail banking players and whether the settings we have are giving implicit guarantees and benefits to those major organisation that are going to – quite rightly, from their point of view – take advantage of that.”
As well as ways to address what Ms Petschler sees as the advantages enjoyed by the big four banks, she says more needs to be done to proactively boost smaller financial groups so they can compete more effectively.
One area that COBA will push the government to look at is home loans and regulations that require smaller financial institutions to hold a greater amount of capital against their mortgages, because they are seen to not have the same risk management frameworks in place as larger institutions.
Ms Petschler said these rules could be relaxed to lift competition in the mortgage market She said the tax system could also be tweaked to give credit unions and building societies a leg up.
Credit unions and building societies earn franking credits on the tax they pay, but they do not have an avenue to return those credits to their customers in the same way that banks and other companies do by paying franked dividends to their shareholders.
Ms Petschler said the government could consider ways to allow mutuals to return franking credits to customers in the form of tax relief on interest earned in savings accounts.
‘We are the only credit union system in the world that is fully taxed. It is not that we don’t want to be taxed but the issue is around our ability to deliver the franking credit back to our owners who are our customers,” she said.
The government, which promised the inquiry into the financial system as part of its election platform, has called for submissions by March. Treasurer Joe Hockey has said it will be a “root and branch” review. Ms Petschler said the
inquiry was a chance to “rebalance what is not competitively neutral playing field in retail banldng in Australia “.
“We want to use the inquiry to grow and create more blue sky for our co-operative banldng sector to playa greater role in terms of market share,” she said.
“If we are serious about having a more competitive banking system, then this is the appropriate point to take stock and consider whether the settings we have are encouraging diversity in terms of retail banking players.”
Louise Petschler, Customer Owned
Banking Association CEO