We’re too big to fail, claims minnow Bendigo and Adelaide

Bendigo and Adelaide Bank, which controls just 2 per cent of the $1.6 trillion housing market, has claimed it is too big to fail.

‘Ratings agencies take a very simplistic view’: Richard Fennell. Picture: Mark Wilson

Bendigo and Adelaide Bank, which controls just 2 per cent of the $1.6 trillion housing market, has claimed it is too big to fail.

Bendigo Bank chief financial officer Richard Fennell yesterday told a Productivity Committee hearing in Sydney that ratings agencies were not factoring in the bank’s likelihood of a government rescue in a crisis.

Last year global ratings agency Standard & Poor’s cut the credit ratings of 23 regional banks across Australia because of the increasing risks of surging property prices and high household debt.

The major banks — Commonwealth Bank, Westpac, National Australia Bank, ANZ and Macquarie — were protected from downgrades because of an implicit guarantee from the federal government. The implicit guarantee is argued to benefit the major banks by allowing them to access cheaper funding, as investors are more likely to see the lenders as less risky.

“Ratings agencies take a very simplistic view of the size of a bank and its importance to the economy,” Mr Fennell said.

“As an organisation that has over 500 branches, including 90 in locations where we are the only branch in that location, the idea that the government would accept our failure and the implications of our removal from those locations is difficult to accept.”

Mr Fennell argued for a more competitive playing field in the ­financial services sector at the hearing, one of a series the commission is holding after publishing a draft report of its review of competition in the sector.

The draft found banks and insurers were uncompetitive and boosted profits at the expense of customers. It called for a competition champion on the council of financial regulators, a position which the Australian Competition & Consumer Commission said it would welcome.

ACCC executive general manager of enforcement Marcus Bezzi said the watchdog was well placed to bring its “singular focus on competition” to important regulatory decisions in the sector.

“We believe there is considerable scope for us to work more closely with APRA, ASIC and the RBA,” Mr Bezzi told commission chairman Peter Harris. “Such an approach would ensure that nothing ‘falls through the cracks’.”

Westpac chief financial officer Peter King said while there was plenty of competition in the sector, there was a need for better tools to help consumers compare products.

Mr Harris had complained the mortgage market is opaque and pricing decisions are “particularly difficult to understand”.

Mr King said mortgage brokers and aggregators needed to be held to a responsibility to act in the customers’ best interest — in line with other financial advice laws. “It should apply to the entire industry, not a subset of the industry,” Mr King said.

The commission recommended unused lenders’ mortgage insurance be refunded to customers. Mr Harris said he was “struck” by the number of borrowers sold LMI. About one in four loans is sold with LMI.

LMI, sold to borrowers without a deposit of at least 20 per cent, protects a bank from suffering a loss in the event of a borrower default.

Choice chief executive Alan Kirkland said the LMI sector should be shut down. “We’d argue for an abolition of LMI,” Mr Kirkland said. “Consumers don’t understand what it is. To the extent that some borrowers present extra risk, that risk should be priced into the loan.” .

QBE and the local arm of Genworth Mortgage Insurance are the two main operators in the Australian LMI sector. Insurers owned by ANZ and Westpac only service their parent bank.

According to the commission’s draft report on competition, claims on lenders’ mortgage insurance are rising.