Treasurer Scott Morrison says banking regulation can be used by incumbents to limit competition and the government wants to "recalibrate" settings in order to empower customers and increase competitive tension in the sector.
"Complexity and inertia in highly regulated markets is business' profits best friend, and often the consumer's worst nightmare," Mr Morrison said at a Bloomberg event on Thursday.
Echoing recent comments by former treasurer Peter Costello, who described the banking sector as a "quadropoly" with profits driven by "a unique and privileged regulatory system", Mr Morrison said banks "have been built on regulation, frankly."
"And over time, large businesses who live in and depend on the regulatory environment can get very good at seeing those regulations work to their advantage and the balance between those businesses and customers can get out of whack," Mr Morrison said.
The comments come after the government asked the Australian Prudential Regulation Authority to make it easier for new banks to get licences. Requirements attached to bank licences such as minimum levels of regulatory capital are examples of regulations that act as a barrier to entry for new players, protecting the market share of incumbent banks.
In the federal budget, the government also referred competition in the banking sector to the Productivity Commission and said it would introduce an "open data" regime to allow customers to access their banking data and use it to shop around for better deals.
The government was trying to "restore greater competitive pressures ... by increasing the power of the customers," Mr Morrison said.
"The strong customer is the guarantee of a strong market – I see that as a completely pro-market point of view.
"Fundamentally, competition is about the power of the customer in the market and that is the thing we are seeking to boost ... Over time, you need to recalibrate that regulation to ensure the customer is at the centre of universe."
'Overreactions'
After the banks said in recent submissions to Treasury that the government's new Banking Executive Accountability Regime (BEAR), another policy from the budget designed to improve culture, would blur the lines of responsibility between APRA and the Australian Securities and Investments Commission and breach principles of natural justice by giving APRA powers without court oversight, Mr Morrison suggested the government would stand firm.
"I am not surprised there has been a bit of a push back to a stronger accountability regime in the banking sector, and we are sifting through those responses," he said.
"I think there has been some predictable reactions, I think there has been some overreactions and I think you will see the legislation that comes forward will stay very true to what I announced in the budget."
He added it was not the government's intention for BEAR to have retrospective application and said the bill would likely be introduced in October.
The Treasurer also welcomed APRA's independent prudential inquiry into Commonwealth Bank of Australia, announced on Monday, saying "it is important they do it and I am very pleased they are doing it".
"I think it is important and I am pleased CommBank has welcomed it and are funding it, as well as cooperating with it.
"These are a very serious set of issues that have occurred, not just in relation to the matters AUSTRAC is bringing before the courts but a series of events. So it is important the regulator goes and does its job, which it what it is doing."
An APRA inquiry was preferable to a royal commission into the sector as proposed by Labor because it would deliver a public report in six months, and "I hope to see interim report sooner than that", he said.
He added it would also be accompanied by prompt action. "They won't be recommending things, they will be doing things ... when they find something they will take action."
Bank tax stays
Mr Morrison sought to reassure banks the government had no intention to lift the controversial bank tax introduced in the federal budget, saying "we set it at the level we thought it should be set at".
He also acknowledged the importance to the banking sector of the government maintaining its AAA credit rating.
"These things also have an impact in the flow through ratings of our major banks. We saw that soon after the budget, when the major banks retained their ratings because we retained ours, but those who are less impacted and protected by our regulatory system, we saw their ratings fall. That can have impact on cost of borrowing."
The government was pleased caps on interest-only loans introduced by APRA had taken the heat out of the top end of the investment market and he said the shift back to principle and interest loans "not only takes one of the stimulants out of bidding higher prices but also gets people to think about paying off debt not just increasing it".
"The discussion about [interest] rates these days isn't about are they going down, but when they are going up, and I think that's an obvious insight," he said.
The government is confident all the focus on bank conduct and culture would not weaken the system.
"We have a strong and resilient banking system. It is one of the keys of our national economy, and has been for decades and that is not under threat I believe by the events we have seen.
"These go to other matters of practice and behaviour which are appropriately being dealt with by our very strong regulatory agencies and the system is working well to address it."
