25 February 2008

What the government can and can't do about banks

The Rudd Government's package of measures to make it easier to switch banks has been welcomed by many of those familiar with the red tape of trying to do just that. But how much can the government interfere with the operations of the private banking sector?

Under the Banking Act, the government has an obligation to ensure banks not only comply with the Act but also to see that there is a fair marketplace.

The new measures announced by Treasurer Wayne Swan focus on the red tape involved in transferring direct debits and credits when you move to a new bank and entry and exit fees when you change mortgage lenders.

"The Account Switching Package will reduce unnecessary barriers to customers changing providers and increase consumer awareness of financial services products and their costs and how to go about switching if that is what suits them best," the Treasurer says.

But can it be argued that the banks are private businesses that should be able to act as they choose without government interference? After all, the government doesn't run around setting food, housing or clothing prices, so why should it interfere with the banks?

The argument for government interference rests with the need for a fair marketplace and for transparency when the banks change rates and/or fees. For instance, fees don't always reflect the actual economic cost. It seems hard to justify the banks slugging customers with a $35 overdraft fee when an account is in the red to the tune of just $10.

Interaction between government and banks isn't new. Up until 1986 the government imposed a 13.5 percent ceiling on mortgage rates.

Christopher Zinn of Choice says his organisation both supports and endorses the Treasurer's four-point package.

On the issue of exit and entry fees on mortgages, Zinn says: "If you compare Australia's exit and entry fees on home loans with other countries, we are at the top, which is an indication that Australian banks are not as competitive as overseas. And we believe it's competition that drives down prices."

Another issue when changing mortgage lenders is timing. Denis Orrock of Infochoice believes the government should mandate both the timing and costing of terminating a loan.

"As it stands it's not hard to switch lenders; what is hard is to discharge the loan and the banks seem to make it difficult," says Orrock. "The government should mandate a timeframe for switching loans, say 10 to 15 working days, and what is a reasonable cost for terminating a loan."

As to the move to raise rates, Choice's Zinn accepts the banks may be entitled to pass on the increasing cost of business to customers, but his concern is that there is not enough transparency in the system.

Under the Howard Government, the banks tended to move in tandem with the Reserve Bank, so when the central bank raised the base rate, the banks followed suit. When rates were falling, the previous government put pressure on the banks to lower their interest rates accordingly. That pressure wasn't necessary when rates were rising, as the banks readily moved in line.

As Saul Eslake, chief economist with the ANZ, observes: "[Former treasurer] Costello did not threaten regulation but he did exert heavy moral pressure on the banks". But since the federal election, the banks, led by the Commonwealth, have acted independently of the RBA. Was this because of a change in government?

David Bell, CEO of the Australian Bankers Association, thinks not, saying these independent moves were all to do with the subprime crisis in the US and so it was not reliant on the change in government.

"There is a claim that the previous government could have somehow, if they had been re-elected, been able to hold back the tide of out-of-cycle interest rate increases," says Bell. "This doesn't make sense because the increases stem from the US sub prime lending problems. While product pricing is an individual bank matter, the ABA sees no evidence that recent bank interest rates increases have been unjustified."

Government involvement in the banks' operations appears to have a role in ensuring fairness. Just how far that will go remains to be seen.

By Gillian Bullock, ninemsn Money Feburary 2008


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