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The CEO of a leading building society has said that the federal government’s implied support of the four major banks gives the institutions an “unearned competitive advantage”, and has urged APRA to “move with a prudent level of haste in dealing with this”.
Speaking to The Adviser after announcing the organisation’s annual results, Terry Millett, chief executive officer of Newcastle Permanent, said that the big four banks (ANZ, Commonwealth Bank, NAB and Westpac) are benefiting from the concept of “too big to fail”.
He explained: “The four major banks are considered too important to the economy to be allowed to fail in a crisis situation. The rating agencies have interpreted that in determining the long-term credit ratings of the four major banks, which have implied government support, meaning that they believe that in a crisis the government would step in.
“That reflects in the [banks'] long-term credit ratings, as their credit ratings are higher than they would be if they were just based on their credit worthiness.”
Mr Millett added: “Why does that matter? It means the four major banks are one notch higher than they would be without this implied support and they pay less for their wholesale funding, because they have a higher rating than they should. And, on average, 40 per cent of the funds major banks get (which subsequently get lent out) come from wholesale funding markets.
“That is an important and unearned competitive advantage.”
The building society CEO noted that during the Financial System Inquiry, “a light was shone” on the ramifications of the implied government support, adding that “it was indicated that this needed to be dealt with and had in fact inhibited competition”.
Mr Millett continued: “The responsibility for this is with the Australia Prudential Regulation Authority [APRA], and we believe APRA should move with a prudent level of haste in dealing with this to give a more even playing field.
“Part of APRA's mandate is, in their own language, competitive neutrality, which means not favouring individual players at the expense of others.
“Our view is certainly that leaving the situation in place where the major banks have a 'free kick', so to speak, is not in the interest of the consumer and it gives the big banks an unfair advantage.”
[Related: ‘Fast turnaround times’ drive surge in mutual’s portfolio]
