The Reserve Bank Governor Glenn Stevens got to the heart of our confected argument over bank competition with the following comments in his opening remarks to the Senate banking inquiry in Sydney yesterday.
"Risk has been re-priced since early 2007. All of us are still adjusting to this change and its implications," he said.
And no one is struggling more to understand this changed banking landscape than the federal government, the opposition (especially Tony Abbott and Joe Hockey), Choice the consumers group, and the many critics of the big banks.
The changes this re-pricing of risk are forcing on the Australian banking industry (especially housing finance) are still happening, most notably the refusal by depositors and big funders off shore to give their money to our banks as cheaply as they did four to five years ago.
We are not alone; it is a world wide trend that most of the critics of our banks refuse to acknowledge.
This could go on for a couple more years until investors start losing their fear of losing their money.
In times like this, investors and depositors want strength, and size, not smaller banks.
That’s why the big four banks here have been favoured and the small banks disadvantaged, but even that is now changing.
For example, few of the critics have bothered to acknowledge that non-bank lenders are making a slow comeback in housing finance and that there has been a small but steady erosion of the banks’ share of home finance now for the past six to seven months.
That recovery is from a very low level, but they now have around 10% of the home loan market, up from around 7% a few months ago.
Many critics inside and outside the political process have no understanding of what they are demanding when, as the federal government is now attempting to do, they try to improve the standing of the small non-bank lenders, such as mutuals like credit unions and building societies.
Mr Stevens knows there’s a cost and added risk from this government preference.
As he pointed out yesterday, "The market price of risk having risen, various players want the public purse to take on some of this higher price through various forms of support or regulatory change.
"The various ideas should, of course, be assessed on their merits.
"But an important high-level point is that, in some instances at least, it would appear the taxpayer is being asked to shoulder more risk, one way or another, in order to facilitate the provision of private finance."
This is the key point from the whole banking/interest rates/competition fracas of the past couple of months.
In other words, those wanting (and committing) taxpayers to shoulder more risk (as Mr Swan is effectively doing), are no different than any other rent seekers, such as farmers and car companies wanting protection against imports, or the unions (including medical and other professionals) seeking special treatment via government sanctioned rules, and then resisting when the competition laws are applied.
Mr Stevens said in answer to a question about taxpayer risk from the deposit guarantees:
‘‘I’m not saying that should be dismissed out of hand, but if such proposals were to be adopted, they should be adopted conscious of and taking account of the fact you’ve exposed the taxpayer to some more risk.
"That’s a judgement call and should be done with some care.’’
Mr Stevens said this urge to get taxpayers to underwrite more private risk has resulted from the changed emphasis in banking after the GFC.
"Whereas four years ago the environment was one in which the competition among financial institutions to lend money was intense, more recently it has been the competition to raise money that has been intense.
"Various other things have happened that also have a bearing on the competitive landscape, but this is a very fundamental change in the state of the world.
"That said, the market remains a good deal more competitive than it was in the mid 1990s and borrowers have access to a much larger range of products.
"Moreover, the overall availability of finance to purchase housing in particular seems to be adequate."
So despite the ground rules in banking having changed in the last three years (something bank critics do not fully understand, especially Joe Hockey (who should), there’s no shortage of funds for housing finance in this country.
So why the inquiry? Politics and laziness on the part of the federal government and opportunism on the part of the opposition and the Greens.
Competition is adequate, it’s just the number of competitors has been cut because the old funding model for non-bank lenders is no longer viable.
Just as consumers are cautious and are saving more than they did before the GFC, so are the providers of finance in the markets.
Just look at what is happening in the eurozone.
Anyone who can’t see the links between the problems with Greece and Ireland (which why the economies imploded) and the changes in the funding of our banks, shouldn’t be commenting on the issue.
Market-based lenders and individual depositors want the same assurance in the end: that their money will always be there, without any losses.
The question now is should taxpayers take this risk on board, now that the GFC is over.
On Sunday, Treasurer Wayne Swan buckled
