Competition in Banking

The Global Financial Crisis (GFC) upset the balance between stability and competition in the financial sector that had served Australia well for more than a decade. The non-banking sector, regional banks and foreign banks provided innovation, choice and a high level of customer service, forcing the major banks to respond in kind and also to reduce their net interest margins (NIMs).

The efforts of government and regulators to stabilise the financial system during the GFC favoured the major banks over smaller lending institutions. Major banks have capitalised on this advantage to make competitive gains, notably at the expense of wholesale lenders, but also smaller authorised deposit-taking institutions (ADIs).

Credit unions, building societies and customer-owned banks (mutuals) emerged from the GFC in reasonably good shape, due to their prudent lending standards and conservative attitudes towards risk. Their reliance on deposits rather than wholesale markets for funding minimised the impact of the crisis.

However, mutuals now find themselves at a competitive disadvantage to the major banks, resulting from increased funding costs and other impediments to competition. Addressing the distortions in funding costs and regulatory burdens between the major banks and the smaller lenders can help to restore competition in banking markets.

The aim of this report is to outline the current state of competition in the banking sector, and the key regulatory barriers faced by mutuals. The mutual model provides diversity in banking services, with a different service proposition. This improves competition and increases choice for consumers. The mutual model has continued to operate throughout the GFC, but the developments have affected the ability of mutuals to access funding competitively, which in effect has reduced their competitiveness. Furthermore, Government attempts to improve stability have improved conditions for banks, and further eroded the ability of mutuals to compete.