It’s certainly good that the Government has put another $8 billion into buying mortgage-backed securities, but overall its approach to banking over the past 12 months has been two-faced, half-hearted and, in the end, anti-competitive.
Australia’s smaller banks and lenders are being crushed by the big four, which have had a fabulous crisis.
Demand for home loans has fully recovered; margins have been maintained or expanded; the big four are totally dominating the markets for both deposits and mortgages; and government policy is discriminating in favour of them and against smaller banks.
CBA and Westpac were allowed to buy BankWest and St George and become behemoths, something the ACCC now regrets, and the Government’s deposit guarantee actively discriminated against smaller banks, building societies and credit unions.
The sole offsetting factor is the Government instruction to the Australian Office of Financial Management (AOFM) to buy AAA-rated mortgage securities, “depending on market conditions”.
Christopher Joye has an excellent article this morning detailing how important this has been in providing liquidity to the smaller banks, but he also points out that the decision to guarantee bank deposits just about killed the mortgage securities market at the same time.
That’s because, as Joye points out, the guarantee effectively raised the rating of all bank deposits to AAA – the same as residential mortgage-backed securities (RMBS). That massively boosted the universe of securities competing with RMBS.
Meanwhile, the guarantee itself discriminates against smaller institutions. It costs 70 basis points for AA-rated banks (the big four), 100bps for the A-rate banks (the regionals) and 150bps for the BBB and unrated deposit-takers (the building societies and credit unions).
The smaller banks have complained long and hard about this but have got nowhere. Bendigo Bank CEO Mike Hirst says that for smaller institutions, using the guarantee is simply uneconomic.
This morning’s Daily Telegraph reports that retail deposits with the big four banks are up 18% over the past 12 months to a record $356 billion in August. The article is based on research from Core Data, which estimates that the big four’s dominance is costing depositors at least $3.6 billion in interest because of the lower interest rates available at the big four – even though they pay less for the guarantee.
Meanwhile, research by JP Morgan and Fujitsu Consulting last week showed that the mortgage market share of the big four had risen from 67% before the GFC to 82% now. They are writing almost 100% of new mortgages.
Before the crisis the RMBS market was worth about $50 billion – quarter of the total mortgage market. It then shrank to zero: the only buyer this year has been the AOFM.
But last month ME Bank and Suncorp Metway reopened the market with a total of $2.5 billion in new issues, most of which went to private investors.
The real problem, as Chris Joye points out, is that super funds remain obsessed with equities, counting domestic and international equities as separate asset classes even though they move together.
The 30/20 rule required super funds to hold a minimum proportion of their funds in government and semi-government bonds from 1961 to 1984. Since its abolition, funds have invested mainly in equities, which have arguably not produced a sufficient return over bonds to justify the extra risk.
In the absence of something genuinely bold from the Government, which it’s clearly not in a mood to do, super funds must step up and support mortgage competition.
Home mortgages are the perfect asset for superannuation savers who can’t access their super to buy a house – so their funds should do it for them.
This article first appeared on Business Spectator.
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