Yet another bank inquiry a political excuse not to act

Josh Frydenberg’s ACCC inquiry into bank mortgage pricing is all about politics, with very little in it for competition. The Treasurer last month told this column he “remains to be convinced about the need for another ACCC inquiry”.

The only thing that has happened since is the banks didn’t pass on the full rate cut handed down by the RBA. Perhaps others in government, like Scott Morrison, weighed in.

Politicians like a scapegoat, and the Prime Minister has the banks and energy companies.

Australian consumers are still waiting for the dividends and, if the energy retail default price is any guide, bank customers will be waiting a while longer.

There have been 57 separate government-initiated inquiries into the banks since the GFC in 2008 and the last time the ACCC handed the government a report on bank mortgages was November last year.

The plethora of inquiries tells you something about how difficult it is to shake up an industry in which the top four account for 80 per cent of mortgages, 75 per cent of small business loans and 60 per cent of branches.

Whether the 57th inquiry cracks the code and gets something done remains to be seen.

It also tell you a lot about this government’s inability to make decisions as opposed to creating the appearance of doing something. Far from complaining about all the attention, the industry should be asking itself why. If honest, it would acknowledge its role in the game of political football.

Granted, last year’s ACCC inquiry looked at a slightly different issue — whether the banks passed on the cost of the bank levy, and decided in the negative — It also looked at the rate hikes caused by the APRA decision to restrict interest-only loans.

That decision has since been reversed but the conclusion was regulatory action has a clear impact on mortgage prices.

Frydenberg is yet to act on the Productivity Commission report handed to him 14 months ago which among other issues recommended more transparency around the 4000 different mortgages products on the market.

The PC said the banks should be forced to publish their full rate sheets by postcode so people know what the rates are. But transparency has never been favoured by bankers.

ACCC chief Rod Sims is also keen to focus on the pricing differential between new and old mortgages because, while it makes sense for good borrowers to pay less than bad ones, it doesn’t make sense loyal ones need to keep asking or they will pay more.

The banks somewhat disingenuously said they looked forward to presenting the facts around mortgage pricing.

The question being: why haven’t they done so in the past.

The banks face a tricky time when they report their full-year results in a few weeks, with ANZ and Westpac reporting ahead of the November RBA meeting.

In the last six months the key reference rate, the bank bill swap rate, has fallen around 40 basis points which roughly translates into cheaper funds for the banks and means, on this score alone and other things being equal, the banks will report higher net interest margins for the full year.

Then again, you also have to throw in the 50 basis point cut in official rates which partially offsets the BBSW fall to the extent the official cut was passed on.

All eyes will be on bank margins to test their interest rate moves, because any expansion will make it hard not to pass on the full rate cut if any.

If you exclude the cost of remediation, the big banks are earning about a 12 per cent return on equity against a cost of funds of around 9.5 per cent, which means a profit margin of 2.5 per cent.

We are at a low point in the bad debt cycle, which means costs are low and bank profits must be booked through the cycle so some margin is acceptable — it is just how big a margin.

Politically, the government may want to kick the banks, but more rate cuts means deposit cuts and with only roughly five million mortgages that means there are more people either renting or having paid out their mortgages.

Like a good regulator, Sims has weighed in on the rate cut issue, and, hey presto, we have the inquiry Frydenberg wasn’t convinced we needed a couple of weeks ago. Politically, Frydenberg gets to show how tough he is. The regulator gets to regulate. But what does the consumer get?

The answer is not a lot.

Politicians love inquiries. They make them look tough and don’t report for 12 months, by which time we have all forgotten what was on the table in the first place. If the Treasurer wanted an inquiry into bank competition then the trigger of not passing on rate cuts is a poor excuse. Even Frydenberg would understand the RBA is but one part of the banks’ decision on rate setting.

CBA has more than a quarter of its depositors on less than 25 basis points, which doesn’t leave much room to move and borrowers are also depositors.

The banks, who say they will use this inquiry to explain how mortgages are priced, will no doubt also explain why they haven’t done so more effectively since the infamous Westpac banana smoothie video when then boss Gail Kelly tried to draw a line between higher banana prices in the wake of the cyclone and interest rate hikes.

If Frydenberg wants the banks to lend more he would understand that when they are losing money they won’t be lending any.

Bank return on equity in 2003 was around 21.5 per cent. Today it is 12 per cent, excluding remediations costs, but over that time capital levels have increased from $11bn to $60b.

Frydenberg has had the Productivity Commission report on bank competition on his desk for the last 18 months — and the royal commission report which adopted some PC recommendations.

Maybe it would be better if Frydenberg made some decisions on those recommendations rather than launch another politically-motivated inquiry.

One thing common to both reports was banning trailing commission for mortgage brokers, which tend to make them stay loyal to the original bank.

The government rejected the PC recommendation to include the ACCC on the Council of Financial Regulators but by all reports dialogue between the ACCC and APRA is increasing.

Then treasurer Scott Morrison established the ACCC financial services unit in May 2017 with the purpose of conducting inquiries into the industry. Ask yourself what the ACCC will come up with that Ken Hayne and the PC didn’t after a combined two-year examination of bank competition.

Sims will trumpet his powers to coerce witnesses to talk to him — something Hayne also had — and no doubt he will come up with something. He is a good regulator.

But the main question is what is being done to improve competition. Steps are being taken, with open banking meaning people will next year have access to their bank data.

The next step is to force transparency by making banks publish their full mortgage rate settings by postcode, so consumers know what the person next door is paying.

You don’t need an inquiry for that. You need a politician capable of making a decision.