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Report Into Australian Bank Practice Finds Lenders Unfair

Posted: February 3rd, 2017 | Author: | Filed under: Business News, Indeep Media | Tags: , , , , | Comments Off on Report Into Australian Bank Practice Finds Lenders Unfair

Report Into Australian Bank Practice Finds Lenders UnfairI’ve banked with a small bank – Bendigo Bank – since my return to Melbourne 8 years ago. Australia’s big banks have plenty of critics, and now they can add the Small Business Ombudsman to that fast growing list.

The high profile Ombudsman, Kate Carnell, who has authored a report released today into banking practices, has found lenders are not being fair when they enter into contracts with small and medium-sized businesses.

The big four banks enjoy a $19 billion advantage over their smaller rivals by still being able to self-calculate the riskiness of their home loans according to analysis from the Australian Prudential Regulation Authority.

Despite a new regulatory framework requiring the big banks to hold larger top tier capital buffers, their ability to internally assess their asset risks is still a huge advantage in terms of the amount of “expensive” capital locked up and their ability to access cheaper funding.

While the CBA, NAB, Westpac and ANZ are now required to base their regulatory capital on a blanket of at least 25 percent of mortgages being at risk, smaller lenders must base their risk weightings at 39 percent ::::

“Across the board the contracts that were in place between banks and small businesses [were] simply unfair,” Ms Carnell said.

The ombudsman’s report into banking practices has been released today by the Government.

It found that there is an unequal relationship between the banks and small and medium-sized businesses that borrow from them.

“In a nutshell, I think that most small businesses believe that if they borrow money from a bank and they pay back the amount of money that the bank says they have to pay back every month, and they do that on time, that should be enough,” said Ms Carnell.

“The fact is we found the banks have a power under the contracts that are currently in place to revalue assets and do a range of other things that means that their loans can be defaulted even when they’re paying back the amount of money that was stipulated under the contract.”

The inquiry looked at 23 of the worst examples of banking practices.

But Ms Carnell said the problem went well beyond the small number of cases she investigated.

“We looked at the big four banks and we think they are the main culprits,” she said.

She said the recommendations to the sector, including making contracts easier to understand and stopping the practice of non-financial defaults, could be implemented by the banks tomorrow.

But the ombudsman is frustrated that the banks have refused to improve their practices in the past when similar reports and recommendations have come out.

“We’ve had a look at 17 inquiries over quite a number of years with the banks saying ‘yeah, yeah, yeah, we’re going to change’ and then they don’t. And then they find a way to have another inquiry and kick the can down the road to find another reason why they won’t change.”

The Minister for Financial Services Kelly O’Dwyer, who commissioned the report, denies the inquiry’s findings will intensify calls for a royal commission into the banking sector.

“Because the findings of this particular report are very much in line with the action that the Government is taking already,” Ms O’Dwyer said. “In fact, the Government has been ahead in actually designing a one-stop shop for consumers to be able to have a resolution of their complaints in a very speedy manner where it is binding on the parties and they get access to compensation where that’s appropriate.”

The one-stop-shop is currently being worked on as part of a separate inquiry into the banking sector, and the recommendation is due to be delivered to the Government by the end of March.

In the meantime, Ms O’Dwyer said the banks agreed they needed to change their ways and she will be holding them to account.

“Now I’m not going to pre-empt what the response is going to be there, but obviously we’re going to look very carefully at their response,” Ms O’Dwyer said. “In a month of this report being released, they’re going to be in front of a parliamentary committee that will ask them very detailed questions about their progress with not only what they have said they are going to do in the past, but also in relation to this very important report.”

The heads of the big banks will be asked about this report, and more, when they appear before the House of Representatives Committee on March 3.

Australia’s Big Banks get $19B Advantage Over Rivals

The big four banks enjoy a $19 billion advantage over their smaller rivals by still being able to self-calculate the riskiness of their home loans according to analysis from the Australian Prudential Regulation Authority.

Despite a new regulatory framework requiring the big banks to hold larger top tier capital buffers, their ability to internally assess their asset risks is still a huge advantage in terms of the amount of “expensive” capital locked up and their ability to access cheaper funding.

While the CBA, NAB, Westpac and ANZ are now required to base their regulatory capital on a blanket of at least 25 percent of mortgages being at risk, smaller lenders must base their risk weightings at 39 per cent.

“That difference in risk weights directly impacts the amount of capital held for a given portfolio of loans,” APRA noted in a detailed answer to a question on notice from the House of Representatives Economics Committee hearing last month.

APRA’s modelling assumed a 14 percentage point differential in risk weightings between the big Internal Ratings Based (IRB) lenders and the other smaller authorised deposit-taking institutions (ADIs), as well a 9 percent holding of top tier capital.

“(This) equates to a reduction in CET1 (Common Equity Tier 1) capital requirements of approximately $19 billion, in aggregate, for the four major banks’ current Australian residential mortgage portfolios,” APRA said in its answer to the committee.

The difference in capital requirements also impacts banks’ profits and profitability, particularly in the cost of funding.

APRA said the big four enjoyed a pre-tax funding cost advantage of around 14 basis points, although this narrowed to 11 basis points due to a marginally higher capital requirement for being defined as domestic systemically important banks.

Despite Financial System Inquiry, rules still favour big banks

The Customer Owned Banking Association – representing credit unions, building societies, mutual banks and friendly societies – said the APRA analysis showed regulatory rules still heavily favour the major banks.

“Common equity tier one regulatory capital is the most expensive form of funding and APRA allows the major banks to hold less of this form of funding against mortgages compared to their competitors,” COBA chief executive Mark Degotardi said. “What it means is that, in the mortgage market, the major banks have a head start built into the rules of the game.”

The banks argue they have to spend hundreds of millions of dollars maintaining their internal rating certification to understand exactly what is happening in their loan portfolio and therefore warrant a discount on their risk weightings.

Second-tier lenders, such as Bank of Queensland, Bendigo and Adelaide Bank and Suncorp are also working towards achieving the expensive IRB certification, which would lower their risk weightings.

The Financial System Inquiry, chaired by former CBA boss David Murray, drove reforms to push up risk weightings for major banks to at least 25 percent after concerns were raised about the reliability of the banks continually lowering the risks they were calculating, and in turn reducing the amount of tier one capital they were required to hold.

The big four had previously held their risk weightings at between 14 and 20 percent, with some mortgage portfolios having fewer than 4 percent of loans deemed to be at risk.

Big Banks Set to Face Tighter Rules

APRA chairman Wayne Byres told a Financial Services Institute function last week that raising risk weights from around 16 per cent to 25 per cent was an “interim step”.

Mr Degotardi noted that, after the FSI’s top recommendation to make regulatory capital for major banks “unquestionably strong”, the second recommendation was about narrowing the gap in mortgage risk weights between the major banks and other banking institutions.

“APRA has taken an interim step to narrow this gap but should go further,” he said.

COBA is also looking for action on the third FSI recommendation, reducing the guarantee implicit in the banks’ “to-big-to-fail” status, which the Reserve Bank calculated was worth almost another $4 billion back in 2013.

In last week’s speech, Mr Byres said 2017 would be “a year of consultation” over the next steps in the FSI and implementing new global regulatory requirements.

“Even if that is the case, they would not take effect until at least a year after that,” Mr Byres said. “Capital accumulation remains the appropriate course for most ADIs, but with sensible capital planning the actual implementation of any changes should be able to be managed in an orderly fashion.”

Mr Degotardi said it is disappointing there is no timetable to push ahead with the FSI reforms.

“COBA would like to see APRA acting with greater urgency in implementing reforms that add to banking system resilience and reduce the advantages major banks have over their smaller competitors,” he said.


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