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A consultation has been launched aimed at making the Australian banking sector more “dynamic, diverse and resilient”.
The Council of Financial Regulators (CFR) is calling for responses to its consultation on how to improve competition for small and medium-sized banks.
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The Treasurer announced in July that he had directed the CFR to conduct a review of the small and medium-sized banking sectors, in consultation with the Australian Competition and Consumer Commission (ACCC).
The call came after Treasury identified a “range of current and emerging challenges facing small and medium-sized banks”, particularly around regulatory and market trends affecting their competitiveness and current and potential future sources of (and barriers to) competition from these sectors.
An issues paper has now been released by the CFR for consultation, outlining the current landscape and some of the challenges being faced by smaller lenders.
For example, it said that while 10 new banks had been set up in recent years, five of these have since closed their doors, including Volt Bank, Xinja Bank, and Islamic Bank, among others.
The CFR acknowledged the dominance of investor-owned banks in Australia, with nine institutions controlling 84 per cent of banking system assets, while Australia’s 55 customer-owned banks, which include mutual banks and credit unions, make up less than 6 per cent of the banking system.
The paper also reflected on how stringent banking regulation should be and highlighted the importance of proportionality, saying “proportionality is about ensuring regulation is commensurate to risk”.
What’s on CFR radar?
Some of the key points the regulators are seeking industry feedback on include:
- The role and impact that small and medium-sized banks play in providing competition and how that benefits consumers.
- How the nature and extent of competition differ across different banking products and market segments (including mortgages and the mortgage industry).
- How consolidation in the banking sector impacts competition.
- What competitive pressures from sectors outside, or adjacent to, the banking sector are impacting the competitiveness of small and medium-sized banks (for example, mortgage brokers and non-bank financial institutions).
- What regulatory or supervisory changes could be made to assist small and medium-sized banks in gaining benefits from scale.
- If the current regulatory and supervisory frameworks strike an appropriate balance between safety, stability, and competition.
- If financial system protections for consumers are appropriate and if there are any steps that could be taken to improve consumer outcomes.
- If there are changes that could be made to resolution tools (including the Financial Claims Scheme [FCS]) that would enhance the balance between safety, stability, and competition in the regulatory framework?
The CFR wants feedback from stakeholders on a list of 21 questions by 7 February 2025.
Industry welcomes review
AMP Bank CEO Sean O’Malley praised the Council of Financial Regulators (CFR) review into small and medium-sized banks and said AMP “looked forward to contributing”.
“A healthy and competitive banking industry, beyond the big four, is vital to all Australians,” O’Malley said.
“Home ownership is the most defining financial decision most Australians will make in their lives, and they must have access to a broad and competitive lending market. Small and medium sized banks play an essential role in driving this competition.”
The Customer Owned Banking Association (COBA) CEO Michael Lawrence said: “This review is a once-in-a-generation opportunity for regulators and the Government to reshape the Australian banking landscape. It’s a chance to create a truly diverse banking system that empowers consumers with greater choice.”
Lawrence stressed the need for proportional regulation.
“Customer-owned banks offer a powerful counterpoint to the investor-owned banking model, but it’s important that regulators understand this difference when they create rules for the banking industry. We believe this dominance has led to a view of ‘investor owned’ by default in policy and decision-making, and we are hoping this review will result in a more balanced and nuanced approach to regulation,” Lawrence said.
However, he said that while COBA welcomes the government’s forthcoming regulatory grid as an important first step towards transparency, it believes that more needs to be done.
“Better-coordination and prioritisation across government will support smaller entities to compete with their larger counterparts and allow specific changes to be considered from a holistic perspective,” Lawrence said.
“The CFR acknowledged ‘a competitive banking system is critical to Australia’s long-term prosperity’, and ‘small and medium banks are key contributors to competition and their communities.’
“Customer-owned banks are fundamental to a diverse, thriving and competitive retail banking market in Australia. Our sector provides a distinct alternative to shareholder-owned banks, offering consumers purpose-led banking that puts people and communities first.”
[Related: Government measures introduced to help mortgagors find better rates]
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