Treasurer Wayne Swan is under increasing pressure to abandon his policy of guaranteeing bank borrowing amid claims it is allowing the big banks to hold monetary policy to ransom.
Christopher Joye, who headed Prime Minister John Howard's 2003 Home Ownership Task Force says the guarantee has given Australia's four biggest banks "de-facto control" over interest rates.
Last week all four refused to pass on to mortgage holders the full 0.25 percentage point Reserve Bank' interest rate cut and one passed on nothing at all.
"The notion that our vital monetary policy lever has been suffocated in this way is deeply disturbing," said Dr Joye. "One frequently noted strength of Australia - the assumption that there was more interest rate ammunition left to deploy - looks to have been eviscerated."
Smaller banks and non-bank lenders that would have once provided competition are unable to offer lower rates because they are charged roughly twice as as the big four to use the borrowing guarantee...
St George, BankWest, RAMS, Aussie and Wizard are among the lenders swallowed by the big four.
Bendigo Bank, said Thursday it could not afford to pass on any of the Reserve Bank's 0.25 per cent cut because it had been priced out of using the funding guarantee.
"Small banks and institutions such as ours are effectively denied access to affordable funding," said Bendigo chief Rob Hunt yesterday.
"It's threatening to create a two-tier economy in which the second tier struggles to get funding."
"The risk is it make the recession deeper and longer than it needs to be".
Dr Joye, who runs the funds management firm Rismark said the government should stop guaranteeing bank borrowing and instead guarantee individual new mortgages.
"It should offer each good-quality new mortgage its AAA govenment rating in return for a fee. That way it would just as cheap for cheap for banks and non-banks to fund them. It would reintroduce competition. The government already knows how to identify good mortgages. It's Office of Financial Management does so when it invests in them," he said.
Mr Hunt backed Dr Joye, saying there was an urgent need to reestablish a "level playing field".
"We supported the quick action the government took in November to get the big banks reliable access to funding. We recognised that it would lead to distortions, but we accepted that systemic stability was paramount."
"Now that the system is stable, the government needs to reconsider its pricing regime if it wants to reestablish a competitive system."
Dr Joye said the big four were beginning to use their government borrowing guarantees in a ways the government had not intended.
"It is well known that one of the majors is restricting credit for housing in order to buy banks in China," he said. "This seems highly questionable in the midst of a credit crisis."
"Given the poor track-record of Australian banks overseas - think of NAB in the US and AMP in the UK - there is a compelling case that these taxpayer-subsidised utilities should stick to their knitting."
Canada’s banking system was judged the world’s safest by the World Economic Forum and guarantees confirming mortgages rather than institutions.
Dr Joye said the switch would save the government the $4 billion it plans to spend buying residential mortgages and could also save it the $2 billion it plans to spend on the so-called "Rudd Bank" if it was also applied to good-quality commercial mortgages.