Monday, November 22, 2010

Swan to swing at banks. Or so he would have us believe

16 per cent return on equity and too big to fail. Bloody hell!

Treasurer Wayne Swan has raised expectations of an assault on the power of the big four banks in next month's banking statement saying he is "determined to see a new pillar in the system" to take on Westpac, National Australia, the Commonwealth and ANZ.

The so-called fifth pillar would be built around credit unions, building societies and wealth management firms such as AMP and AXA which are currently in takeover negotiations.

Asked on the Nine network whether he would approve the AMP bid for Axa Asia Pacific in order to help create the fifth pillar he said he would not speculate but had made it abundantly clear he would "welcome additional investment in the banking system to provide more competition for the big four".

Each incurred the wrath of the Treasurer by lifting its mortgage rate by between 37 and 45 points in the wake of the Reserve Bank's Melbourne Cup day move of 25 points.

"There are better deals down the street," Mr Swan said yesterday. "If you go to a credit union you may be able to get up to 100 points better in terms of your mortgage. The big banks behave in an arrogant way because they feel confident their customers won't walk."

The Treasurer spoke as the Whitlam Institute released a study finding the big banks "overcharge their home loan customers"... avoid pressure to reduce costs, and funnel the excessive profits to their senior executives.

Prepared by former Labor staffer Nicholas Gruen of Lateral Economics the study claims home loans have become "commoditised" and simple to provide.

"Normally when a product becomes commoditised, its price falls to eliminate the margin, but the mortgage margin is stuck where it was in 2004, at around 2 percentage points," he the Herald.

Dr Gruen wants the government to lend its AAA credit rating to mortgages with a safe loan to valuation ratio, enabling non-bank lenders to get access to funds for mortgages on the same terms as the big four.

In Canada where there is such a system the insurance costs as little as 0.5 per cent of the loan.

Treasurer Swan confirmed his package would make it easier to switch lenders saying it would give "customers the capacity to walk down the street and get a better deal".

In a submission to the Senate banking inquiry Melbourne University finance professor Kevin Davis has proposed allowing borrowers to switch without the discharge of the mortgage and without a new property valuation. Lenders would no longer have "absolute discretion" to change the interest rate" but would have to vary it by "reference to objective information".

Published in today's SMH


Commoditising Banking Nov 2010


Commodising Banking Executive Summary


Kevin Lewis Senate Banking Submission


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. Banks costs. They're increasing. But by less than the cash rate.




7 comments:

The Lorax said...

Read March of the Rent Seekers for a different perspective on what Nick Gruen is up to.

Mr Gruen is describing a level playing field of economic rent-seeking, with the two halves of Australia's dated Wallis architecture - banks and non-banks - fastened at parallel public teats.

Anonymous said...

tell gruen to bugger off. We don't want our money (taxpayers) underwriting the australian housing bubble. If you want to speed up competition in the banking sector all it requires is the removal of IWT tax on foreign depositors as recommended in the Henry review. No risk to taxpayers there.

The Lorax said...

Meanwhile, RBA tells Chris Joye to bugger off.

Ms Ellis, in a private email to Mr Richards and several colleagues, insisted there was no evidence the boom in the early part of the decade was caused by changes in supply-side conditions, more the price and availability of credit.

...

"The people pointing to supply-side factors really believed at the time that if only these supply restrictions didn't exist, prices would not have risen quickly. This is just rubbish, and we said so.

...

Six months earlier, she warned the RBA against statements that supply was more of a problem than demand and "housing would be affordable if only those nasty supply restrictions were abolished".


Go Luci!

Kate Stanley said...

Actually Lorax you have grossly misrepresented what The Australian reported today. They first pointed out that the RBA had ended up belatedly agreeing with Joye...

"A year ago, Rismark International managing director Christopher Joye emailed RBA head of financial stability Luci Ellis, and head of economic analysis Anthony Richards, to welcome RBA governor Glenn Stevens's public statements that supply-side problems were contributing to price rises. Having long argued that prices had been driven higher by a lack of greenfield sites and poor planning decisions, Mr Joye took some delight in the fact the RBA had "jump(ed) on the supply-side bandwagon"

While Ellis tried to argue that elastic housing supply was bad in 2004 bad good in 2009, this is obviously contradictory, as Chris Joye notes on his blog today.

The more important point that the RBA agreed with him on was in relation to house price bubbles...

"Mr Joye criticised Mr Stevens for his "unconditional" claim that local housing is very "expensive by international standards". Ms Ellis agreed with Mr Joye that local housing stock differed from the rest of the world and comparisons were dangerous. Six months earlier, she warned the RBA against statements that supply was more of a problem than demand and "housing would be affordable if only those nasty supply restrictions were abolished"."

Kate Stanley said...

sorry should read "housing supply was bad in 2004 but good in 2009"

Anonymous said...

Want to get to the crux of banks behaving badly?

Read Senate enquiry ‘Competition within the Australian banking sector’ - Submission No#2 by P Mair here:

http://www.aph.gov.au/senate/committee/economics_ctte/banking_comp_2010/index.htm

Brilliant expose – full credit to the author both for knowledge base and writing style. Thoroughly enjoyable.

As for Treasurer Swan taking a swing at banks - good.

The Lorax said...

What? I haven't misrepresented anything! Read the article.

Ms Ellis is saying there are both supply-side and demand-side factors at play in the housing market, and that during the boom in the early noughties, demand-side factors were more important.

Ms Ellis, in a private email to Mr Richards and several colleagues, insisted there was no evidence the boom in the early part of the decade was caused by changes in supply-side conditions, more the price and availability of credit.

Chris Joye OTOH has consistently argued that supply-side factors are more important, overwhelmingly so.

Her language could not be more unequivocal, almost mocking:

"The people pointing to supply-side factors really believed at the time that if only these supply restrictions didn't exist, prices would not have risen quickly. This is just rubbish, and we said so.
...
Six months earlier, she warned the RBA against statements that supply was more of a problem than demand and "housing would be affordable if only those nasty supply restrictions were abolished".


Quoting Chris Joye's response is a bit like me quoting Steve Keen. Not exactly balanced.

Good on Ms Ellis for telling the supply-siders how it is. In any market there are two sides, despite what Chris Joye would have you believe.

There seem to be a lot of people on the blogs and forums doing damage control today!

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