Non-major banks face an 'entrenched disadvantage' in the mortgage market

by Julia Corderoy29 Aug 2014
As the deadline for second round submissions to the Financial Services Inquiry closed this week, small banks bound together in their fight for a “level playing field” in the mortgage lending market. 

In its interim report, the Murray Inquiry recognised that the financial system is “competitive, albeit concentrated”. According to the Australian Bankers’ Association, competition in the banking sector can be enhanced if the barriers to competition are assessed, and where appropriate, removed.

The major barrier faced by non-majors is the application of capital requirements. Suncorp Bank argued in its second submission to the Inquiry that the rules around risk weights and capital adequacy created an “entrenched disadvantage” for the non-majors. 

“As a regional bank, Suncorp Bank is required to hold up to three times the level of capital of the major banks against equivalent portfolios with the same underlying risk. This makes clear the competitive differential driven by the regulatory settings. It also highlights the barriers to entry in banking created by the onerous capital and regulatory environment for non-major banks.”

Under the current requirements, major banks are able to adopt an internal-rating based (IRB) risk weight approach, which allows them to have lower risk weights for mortgage lending than the standardised risk weights that smaller banks have to obey.

The Customer Owned Banking Association (COBA) argued in its second submission to the Inquiry that Australia needs to either catch up with the rest of the world in increasing the minimum capital obligations under the IRB approach, or reduce the standardised approach.

“While COBA also supports changes which would see a greater number of ADIs achieving IRB accreditation, it’s likely most ADIs will continue to rely on the standardised approach, and until the gap in risk weights for large and smaller ADIs is narrowed, the imbalance that currently exists will remain an impediment to competition.”

In a response to the Inquiry interim report submitted on behalf of four regional banks – Bendigo and Adelaide Bank, BOQ, ME Bank and Suncorp Bank – APRA is urged to step up and take some responsibility to assist regional banks in  attaining IRB accreditation. 

“APRA could also assist Regional Banks in achieving advanced status by implementing a staged approach, to enable standardised banks to achieve accreditation progressively across their respective portfolios and operations…

“This is not out of step with international precedent. The logical place to start is housing loans as it is a core business of regional banks and the risk is well understood by them.”

Improving banking rules and promoting healthier competition is vital in securing the long-term stability of Australia’s banking sector, the submission argued. 

“Give us a level regulatory playing field and let us get on with providing more Australians with competitive, responsible and ethical banking services.” Acting COBA CEO Mark Degotardi said.