After competitors Commonwealth Bank(ASX: CBA), Westpac(ASX: WBC) and ANZ(ASX: ANZ) raised variable home loan rates to compensate for rising funding costs, it seemed only a matter of time before NAB(ASX: NAB) followed suit.
Yet ultimately it didn’t.
Our new Prime Minister approved, suggesting NAB “gets it” for not raising variable home loan rates “out of cycle” ie without the RBA first raising the official cash rate.
Ostensibly, NAB’s decision was made “to rebuild the trust” of its customers. In reality, though, it was clearly made with the Financial Services Royal Commission – and its revelations of misconduct within the industry – in mind.
Fair enough – and good luck to any NAB customers who benefit from this decision. I support efforts by the big banks and other businesses within the financial services industry to regain trust with their customers.
Yet the best way to do so is for the banks and others to acknowledge the misconduct revealed by the Royal Commission, apologise and then commit to treating all customers fairly and with respect.
That is, the banks shouldn’t try to curry favour with politicians by running their business for political instead of economic considerations. Politicians’ views should be irrelevant and the banks should instead adjust the cost of their loans based on changes to their funding costs and/ or the supply and demand for loans.
Particularly as it is government action – or, in many cases, inaction – that has led to the big banks having an oligopoly in Australia, much to consumers’ detriment as the Royal Commission has revealed.
If politicians were truly concerned about the big banks taking advantage of their oligopoly to raise mortgage rates “out of cycle”, they’d repeal the various policies that support this oligopoly.
Firstly, the regulators could harmonise regulation between the larger “advanced” banks (the big four and Macquarie(ASX: MQG)) and the smaller, “standardised” banks such as Bendigo and Adelaide Bank(ASX: BEN), Bank of Queensland(ASX: BOQ) and Suncorp Bank (owned by Suncorp(ASX: SUN)). Current regulations require the smaller, standardised banks to hold more capital against their loans, providing a competitive advantage to the larger banks.
To be fair, the regulators have made it easier for a “standardised” bank to become “advanced” by allowing it to do so in stages rather than all at once (for example, by first satisfying the regulatory requirements for its mortgage book before doing so for its commercial loan book, and so on). However, this still takes a great deal of time and expense.
The government could also legislate to explicitly state that the big four banks and Macquarie aren’t “too big to fail”. Whatever the politicians might argue today, if any of the big four and Macquarie get into trouble in future, in all likelihood they will be bailed out by the Federal government if it believes this is necessary to stabilise the financial system.
Whatever the merits of this approach, it gives another competitive advantage to the big four and Macquarie by allowing them to raise funds at lower cost than their smaller competitors.
Another change could be the removal of the Four Pillars Policy, which forbids mergers between the big banks. The policy is intended to foster competition but in practice it does the exact opposite. By removing a major source of competitive tension, this policy perversely encourages the banks to be less concerned about bad management and treating customers unfairly, as there is less chance of a badly managed bank being taken over and the bad managers losing their jobs.
Finally, the government could even break up the big banks to create more competition.
All these changes would increase competition and force the banks to treat their customers more fairly, thereby reducing the likelihood of NAB, etc having to play politics to keep in politicians’ good books.
But I guess it’s easier for politicians to play games rather than taking concrete steps to correct their predecessors’ mistakes.