The big banks have never had it so good. Will new Government Reforms take this away from them?
Increased Mortgage Lending competition for the big four banks, and major banking reform from the Gillard Government could see the major banks profits shrink.
The problem is that every government reform aimed at the banks in Australia over the last 20 years have eventually added to the bottomline of the big mortgage lenders. Has this been more because of the banks wiles or the lack of foresight of the Government Policy? Maybe a bit of both.
Mortgage Exit Fees: The Fly in the ointment
Before Christmas I wrote to the Prime Minister and advised her of the "fly in the ointment" of the Wayne Swan proposed solution to our mortgage woos. His solution was a simple one.
Make it a no brainer to switch lenders by removing exit fees on home loans and the rates would fall.
Mortgage Reform problem No 1
The problem was that mortgage managers, the securitised lenders that helped to reduce mortgage interest rates by 3% were the very ones that would be most hurt by the reform.
Why? Because mortgage managers charged the highest exit fees, by way of deferred establishment fees on their mortgages loans
These deferred fees had a sunset clause of about 5 years, so most people never paid these anyway. But it gave a way for lenders to pay mortgage brokers a commission to compensate them for their efforts. Any government reform must address this vital issue. Otherwise it could kill mortgage competition in Australia and set us back 20 years.
Ralph Norris cries Crocodile Tears over the Mortgage Managers plight.
The funniest thing is that the CBA who have all but destroyed the mortgage managers loan sector, with the help of Kevin Rudd's Banking Guarantee support, now says he is hurting for the small end of town. This is just a ploy, but Mr Norris does make the same point I rose last year.
Australia's Banks. Are they too big to control?
Based on Ralph Norris's [CEO of CBA] comments and the reality of the power and control of the Big Four Banks, its time to ask the unthinkable.
- Are the banks too powerful to control?
- Have they become the Mafia of Austalia, where they can do what they like and still be supported by the government?
Sometimes the lines between the profit motive, the public good, and business ethics are blurred and this I believe is where we are in the banking debate right now.
The business Power of the banks
A case on point Norris claims that:
The moves to limit excess fees on credit cards and improve credit protections will have a similar perverse effect as far as the reaction from the major banks.
The new national credit protection regulations means that banks simply have a higher cut off level for those to whom they are willing to provide credit.
Does this not smell of a lender who thinks he owns the lenders and credit space?
If so is he right. I say yes to both propositions!
The law of unexpected consequences
The best intentions of government regulations often create unexpected consequences.
The Government needs to focus more on the purpose of the reform and how it will affect the mortgage industry as a whole.
Any bank and mortgage reform aimed at lowering mortgage rates, and exit fees has to be balanced with the planned growth non bank lenders. That means a no bank involved sector. Not the miss-mash we now have. Allowing banks to own their competitors is a stupid idea that keeps repeating itself in the mortgage lending sector.
Author: Rick Adlam, Mr Mortgage
