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Six of the nation's largest regional banks have implored the government to unblock kinks in the supply side of lending markets, arguing that the sustainability of competition over the long term will depend on policies that help them to raise funding more cheaply.
Bank of Queensland, Bendigo and Adelaide Bank, AMP, Suncorp, ME and MyState have made a joint submission to the Productivity Commission that argues the government has been focusing too much on the potential for fintech start-ups to single-handedly provide a disruptive competitive force in retail banking.
A better approach would be to remove regulatory and prudential distortions that limit the capacity of smaller banks to take advantage of new demand-side policies like open banking, they say.
While the markets for mortgages, personal and business loans are highly competitive between major banks and smaller banks fighting for a larger share of the market, it can't be assumed this will always be the case in the future, said David Carter, chief executive of banking and wealth at Suncorp.
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"There might be 28 lenders today wanting to offer you a mortgage, but we want to make sure we don't wake up one day and find there are four, along with a few non-banks thumbing their nose at prudential regulation," he said.
An expanding number of inquiries and red tape also had the potential to stifle smaller banks' ability to compete. "There are a number of different regulators asking us to do different things:Â provide data, build more databases, do reports, write submissions, change business practices ... for smaller players, our resources are more finite," Mr Carter said.
MyState CEO Melos Sulicich agreed there were plenty of lenders in the market but said "the way the regulatory framework works together, more by accident than design, hampers the ability of the smaller players to provide the alternative we want to".
Policies that would help to even the playing field for the regional banks include reducing the advantage that accrues to the big four banks from an implicit guarantee of government support in a crisis, which allows them to raise cheaper wholesale debt.
The regionals suggest the advantage could be reduced by giving smaller banks access to a government guarantee on their high-quality residential mortgage-backed securities, by allow non-major banks to issue a greater amount of covered bonds, or by more explicitly linking the major bank levy to the cost advantages of being 'too big to fail'.
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The regional banks also want a further reduction in the risk weight differential between them and the major banks, which requires smaller lenders to carry much higher levels of capital than the majors do for loans of equivalent risk, reducing the profitability of their lending.
They have also asked the Australian Prudential Regulation Authority to lift the macro-prudential restrictions that locked in existing market shares, and to pay closer attention to the competition impacts of such policies if they are applied in the future – another recommendation of the PC.
"Regulation is tilted very much in favour of the big four," Bank of Queensland CEO Jon Sutton said. "We are sticking to our guns, especially with the need to level the playing field to create competitive neutrality."
Whether the right balance is being struck between protecting the stability of the financial system and promoting competition will be a core theme at next week's 4th annual AFR Banking & Wealth Summit. Productivity Commission chairman Peter Harris will address the event.
Role for Treasury
APRA chairman Wayne Byres, who will also speak at the summit, was quizzed by the House of Representatives economics committee in Canberra on Wednesday about the PC's criticism that "finesse in the application of regulatory decisions that impact on competition can and should be improved".
Mr Byres suggested the government was best placed to ensure the right balance is being struck. "The PC is not saying change APRA's mandate, but it might give other regulators a stronger voice to pursue those [competition] issues," he said.
"There is also a role here for Treasury, which is at the table and has the whole-of-government and whole-of-community perspective, to make sure there appropriate balancing in regulatory decision-making, and it is not just entirely safety first," Mr Byres said.
The Reserve Bank has told the PC its February draft report "may have overstated some of the competitive effects of regulation and understates the importance of a focus on financial stability".
"Financial stability goals necessarily attract a high weight in regulators' considerations because the cost of instability is high," the Reserve Bank said. However, it also said reducing market concentration in the financial system "would not necessarily be detrimental to financial stability".
ME chief executive Jamie McPhee the momentum of policy was moving in favour of the regional banks, "but we have to be really vigilant to make sure the conversation continues to happen until we see new entrants come into the market".
With mortgage broking governance in focus at the Hayne royal commission, another policy to lift competition would be requiring major bank-owned mortgage brokers to disclose the proportion of loans being send to the brokers' owners relative to the proportion directed elsewhere, he said.
The regional banks said Australia's default regulatory position had "almost exclusively focussed on safety and stability for nearly a decade" but the oligopolistic market structure in retail banking meant there was "a critical need to adjust regulatory settings to better balance the needs of both stability and competition".
The PC's final report is due with the government in July.