An in-depth report by Deloitte Access Economics has found that although two years have passed since the release of the Financial Stability Inquiry (FSI) in 2014, “significant work remains to be made” when it comes to implementing the review’s recommendations.
The report, which was commissioned by the Customer Owned Banking Association (COBA), examined progress on the following four key FSI recommendations:
- Recommendation 1: Set capital standards to make authorised deposit-taking institution (ADI) capital ratios “unquestionably strong”
- Recommendation 2: Increase the average internal-ratings-based (IRB) mortgage risk weight to close the gap between average mortgage risk weights for ADIs
- Recommendation 3: Create a framework for minimum loss absorbing and recapitalisation capacity in line with international practices
- Recommendation 30: Review the state of competition in the finance sector every three years, improve reporting of how regulators balance competition against core objectives, and identify barriers to cross-border provision of financial services
While there has been some progress on the first two recommendations, the report found that more could be done to advance the “limited progress” on the latter two.
“The customer-owned banking sector wants to see more urgency from government and regulators in implementing the key FSI reforms,” said COBA CEO Mark Degotardi.
With findings from the House of Representatives Economics Committee stating that the Australian banking market is an oligopoly, the Deloitte report was very timely, he added.
“The House Economics Committee found that a lack of competition in banking has significant adverse consequences for the economy and consumers.”
Key to tackling this issue is work on Recommendation 30 which Deloitte found had experienced “little progress” relating to updating the regulator’s responsibilities.
“To date, the Government has yet to issue its terms or reference to the Productivity Commission for the review of competition in the financial sector,” the report said.
Looking at the current schedule, Deloitte found that implementation of this recommendation could come into effect by the end of next year.
“In relation to the Recommendation 30 requirement for regulators to explain how they balance competition with their other mandates, Deloitte Access Economics finds that there has been ‘little progress’,” Degotardi said.
“This is particularly disappointing because regulator decision-making can have a significant impact on competition. Deloitte Access Economics mentions two examples of this: APRA
’s approach to regulatory capital instruments for customer-owned banking institutions and APRA
’s application of the cap on investor lending growth.”
The report also contains draft terms of reference for future Productivity Commission reviews of competition in the financial system, he added. Included in this is the recommendation to look at whether rules and procedures of the regulators create “inappropriate barriers” to competition.
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