Why Wayne Swan is delusional if he thinks his bank reforms will help consumers: Bartholomeusz

Wayne Swan is delusional if he thinks his grab-bag of banking “reforms” is actually going to produce benefits for consumers. More likely they will actually damage the interests of bank customers.

Swan appears to believe that the mere announcement of his package of measures in December has sparked the latest outbreak of competition among the major banks, conveniently overlooking the reality that it has flowed quite naturally from National Australia Bank’s decision (and need) to differentiate itself from its rivals by undercutting them on mortgage rates and abolishing unpopular fees. It was NAB again, with its very visible “Dear John” message to its rivals, that has ignited the latest outbreak of price-led competition.

Swan’s so-called reforms – the banning of exit fees on home loans, the proposed new bank sector-specific anti-signalling laws and changes to the credit card regime to outlaw over-the-limit fees and to impose a 10% ceiling on breaches of credit limits – are ad hoc, unnecessary and potentially quite damaging to the industry and its customers.

Not all banks charge exit fees (or deferred establishment fees) for early repayment of a home loan and NAB has only made a limited offer to fund the exit fees for customers switching from their competitors. Westpac’s Gail Kelly made that point on Q&A last night, when she also estimated the cost of establishing a home loan at $2,000.

Banning exit fees – which generally only apply if a customer repays a loan within the first four years – will have a limited impact on the majors and to the extent that it does have a financial cost they will seek to recover it in less visible ways.

It will, however, have a far greater impact on smaller institutions trying to compete on price and needing to ensure that they recover their establishment costs by locking their customers in until they have actually generated some profits from them. Non-bank lenders generally can’t use home loans as quasi loss leaders in order to win customers and cross-sell a range of products.

So, exit fees, to the extent they have an impact on prices and competition are likely to increase the cost of finance and damage the competitiveness of smaller institutions.

The abolition of over-the-limit credit card charges, the 10% headroom over credit limits and other changes to the credit card regime being proposed will involve a significant increase in the costs of credit card providers and appears to mean the government is about to mandate an effective 10% increase in credit limits without a related review of individual risks. The obvious response from the providers (albeit an unlikely one) would be to reduce everyone’s limits by 10%.

More likely is that credit card costs for all consumers – whether they ever breach their limits or not – will rise in order to fund compliance with the new regime and to reflect the additional risks. In what has been a competitive system, with considerable innovation, which operates broadly on a user-pays principle the Swan measures are a retrograde step.

Whether it is exit fees or credit card charges and limits, Swan’s reforms do little for competition and may well reduce it. What they clearly do is to increase the costs and decrease the feel pool for institutions providing consumer financing.

The changes ought to make banks more selective in terms of whom they lend to – they won’t want to attract marginal customers, customers who churn the loans or customers who routinely breach their credit limits – and will also encourage them to socialise the increased costs by spreading them over their entire customer bases.

It is quite conceivable that Swan’s reforms, ultimately supposed to increase competition and lower costs for consumers, will lead to higher-than-otherwise interest costs for consumer finance as banks reverse the trend of the past decade and a half and switch their emphasis from user-pays fees back to their interest margins.

The problem with Swan’s approach – and the anti-price signalling measures that would inhibit discussion about bank funding costs (and have a host of potentially quite destructive side-effects) are a good example – is that they have been poorly conceived, their execution is being rushed and the Government doesn’t appear to be taking any notice of the arguments against them.

Moreover, Swan hasn’t made any case for reform of a system which, while admittedly more concentrated, hasn’t demonstrated any of the signs associated with anti-competitive or oligopolistic behaviour, indeed quite the contrary. Why would anyone mess around with such a vital and sensitive sector of the economy without compelling justification?

On price-signalling, in a market where the emphasis is on transparency and disclosure, why would the Government think it is helpful to consumers, investors and the public interest to muzzle the bankers and prevent them talking about key aspects of their businesses even when there is no anti-competitive or collusive purpose? And why are these measures being applied only to banks if they are so important and worthwhile?

At a practical level, if banks have to apply to the Australian Competition and Consumer Commission every time they want to say something that might fall foul of the new regime – and wait up to two weeks for authorisation – it will have a massive, stifling, costly impact on the sector and potentially generate a host of unintended and unpleasant consequences. And where’s the justification for such a major and intrusive new regime?

Swan’s reforms, of course, were a response to Joe Hockey’s politicisation of banking regulation, as well as to the majors’ decision to raise home loan rates by more than the Reserve Bank’s increase in official rates last November – even though the RBA has made it clear it expected them to do so when it determined the extent of its own rise, which implies it would have raised official rates by more than 25 basis points if it had expected the banks to simply pass on the official rate rise.

There’s been a lot of policy-making on the run and under pressure since the last election. It is not an approach that could be expected to deliver good policy or good outcomes. The proposed banking “reforms” aren’t good policy, it is highly unlikely they will deliver the outcomes Swan says he is pursuing and it is quite conceivable that they will prove to be quite counter-productive.

This article first appeared on Business Spectator.