Submission to the Inquiry into Competition in the Banking and Non-Banking Sectors 1. Introduction

This paper is a submission to the Inquiry into Competition in the Banking and Non-banking Sectors being conducted by the House of Representatives Economics Committee.

The submission is in two broad parts reflecting the Inquiry's terms of reference. The first part provides factual material available to the Reserve Bank of Australia on developments in the markets for mortgage finance, deposit accounts and personal finance. The second discusses some of the longer-term determinants of competition, including the ability of new firms to enter the market, financial innovation, and the ease with which customers can switch institutions.

The main conclusions can be summarised as follows:

• Australian households have benefited from strong competitive pressures in the mortgage market over the past decade. Margins have fallen significantly and are in line with international norms. In addition, the variety and flexibility of mortgage products offered in Australia is high by international standards.
• The recent turbulence in financial markets has changed the competitive dynamics in the system, particularly affecting lenders that rely heavily on the securitisation markets. This has led to a tightening in the conditions under which higher-risk borrowers are able to obtain housing finance, although there has been little change in the availability of housing finance for high-quality borrowers. There has also been an increase in the cost of mortgage finance for all borrowers which, at the time of writing, broadly reflects a rise in lenders' cost of funds. The Reserve Bank does not see a case for government intervention in the mortgage market to address what is a cyclical issue due to the tighter conditions in financial markets, rather than a structural change.
• Competition in deposit markets has strengthened considerably over recent years, with the competition more evident for savings accounts than for transaction accounts. Over the past six months there has been a noticeable pick up in competition for term deposits.
• A major source of competition in Australian retail banking over the past decade or so has been the entry of new players. In a number of areas, new entrants have been able to take advantage of financial innovation and improvements in technology, and have led to significant reductions in the prices of a range of financial services. These innovations and improvements are now features of the landscape and are unlikely to be reversed. Looking forward, ensuring that new entrants are able to enter the market is the most important means of sustaining strong and effective competition. Currently, there are no significant regulatory barriers to entry, although there is a case for further improvements to be made to access arrangements to parts of the payments system.
• Another important influence on competition is the ability of consumers to compare prices and to switch institutions. There have been significant improvements here over recent years, although the ‘bundling’ of financial services has increased the difficulty that many people face when switching institutions.