Experts say Swan’s banking reform will see interest rates rise among lenders

Wayne Swan caused quite a stir among lenders with his banking reform policies which, as he claims, are intended to increase competition in the banking sector and moderate the power of the big four players.

However will his plan, to abolish mortgage exit fees on new standard variable home loans as of this July, really intensify competition or will it actually have a negative impact on smaller lenders?

In a report published on ninemsn’s Money, the Mortgage and Finance Association of Australia suggest smaller players (who account for 3% of the market) will be hurt by the move and that higher interest rates will be the inevitable outcome.   

Chief executive of the MFAA Phil Naylor, told a Senate hearing in Sydney that held in late 2010 that non-bank lenders, who currently charge some of the lowest interest rates, “would have to put up their interest rates. But if they put up their interest rates, they’re no different to the rest of the lenders in the market.”

The very reason any of these smaller players have been able to compete to date when it comes to interest rates is that they often charge pretty hefty exit fees in order to promote customer loyalty.

The ANZ and NAB have abolished their exit fees entirely and the CBA and Westpac levy their customers $700 and $900 respectively for exiting their contract within the first three years, whereas one smaller Victorian lender charges $7,300.

Swan’s suggestion that smaller lenders rely on exit fees as part of their business model does not sit well with Naylor, who responded by pointing out, “They don’t build their model on the fact that everyone’s going to leave in the first three years and therefore they’re going to get $7,000 per customer. That would be dumb.”

Adding further fuel to the fiery argument were comments from Australian Bankers’ Association chief executive Steven Munchenberg, who told the Senate inquiry that the rising cost of global credit would hold non-bank lenders back when it comes to increasing their market share.

“Mortgage originators relied very heavily on a … long period of very stable, very, very cheap credit globally,” he said.

“And there’s no real sign that we’re going to go back at a global level to that situation any time soon.”

Then there was the statement made by Australian Prudential Regulation Authority chairman John Laker, who cautioned the inquiry that too many players could produce less than ideal lending standards.

He said, “I would caution that in the period 2002/2003, we did see quite strong competition in housing lending which took the form of a dilution of credit standards and that was a form of competition which we were uncomfortable with.”


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