Competition among the banks may often be "illusory": ACCC chief

In his speech at the AFR Banking and Wealth Summit yesterday (5 April), ACCC chairman Rod Sims delved into a topic that's often avoided: the drive for financial institutions to achieve stability versus competition.

Sims said it must be recognised that poor performance and failures of banks worldwide were not caused by excessive competition.

“Quite the contrary. Often they appear to have been caused by inappropriate behaviour and endemic short termism, possibly driven by a desire for huge bonuses,” he said.

"The current banking royal commission is also revealing further failures that cannot be blamed on strong competition," Sims added.

Sims fears that if the public continues to insulate major banks from the consequences of their poor decisions, there’s a risk that the cultural change that is so needed will be stifled.

The key is in vigorous competition, he argued. That drives improved efficiency, price, and service offerings for customers.

“Competition is not, repeat not, welcomed by businesses. This is because it delivers better outcomes for consumers. This is exactly what seems to be needed in our banking system,” Sims said.

Homeowners would benefit from increased competition

An interim ACCC report released last month found that not only does competition need to improve among the top five banks— ANZ, Commonwealth, NAB, Westpac and Macquarie— but competition may in fact often be “illusory”.

“Their behaviour more resembles synchronised swimming than it does vigorous competition.”

Sims said the banks his office investigated selectively offer higher discounts to some types of customers.

On average, loyal customers pay higher mortgage interest rates than new borrowers. This indicates that the former are blind to the benefits that vigorous price competition is able to provide, the official said.

Between 30 June 2015 and 30 June last year, “existing borrowers on standard variable interest rate residential mortgages at the big four banks were paying up to 32 basis points more (on average) than new borrowers”.

The ACCC also discovered that the pricing behaviour of those lenders appears to "accommodate" a shared interest to avoid the disruption of mutually beneficial pricing outcomes, rather than competing for market share by offering the lowest interest rates.

“It is clear from our interim report into residential mortgage pricing that there are significant issues in the banking sector which raise concerns about competition in the sector as well as fair trading.”

"Financial stability will be helped by more competition. More importantly, so will consumers," Sims said.

The ACCC will release its final report on residential mortgages after June.