In 2008, during the height of the GFC, people were worried whether their money was safe in the banks. As a result, the Australian Government introduced a bank guarantee for amounts up to a certain threshold, held with authorised deposit institutions (ADIs). Twelve years on from the crisis, this guarantee remains in place and provides a surety of up to $250,000 for money that is held in an ADI.
The guarantee does provide peace of mind to consumers. If an ADI goes bust, its customers will get their money back, subject to meeting a few conditions.
Over the last decade, the RBA has steadily reduced interest rates, yet Australian banks have routinely failed to pass on these cuts in full to borrowers. The banks are seen to be protecting their profit margins and enriching their shareholders, at the detriment to consumers, namely borrowers.
Their self-serving attitude has also wreaked havoc on retirees with term deposits, as the RBA has been forced to make further and, some may argue, unnecessary additional cuts to rates, to try and offset the fallout of the banks not passing on the full cuts. In essence, this has created a negative feedback loop.
Meanwhile, the government continues to jawbone threats to the banks that they need to pass on all cuts in full, but in reality this has been nothing more than political grandstanding. The banks continue to thumb their noses at the government and Australian consumers, placing their profits above any other concerns.
When we think about the Australian financial landscape, the RBA cash rate sits at 0.50% and the 10-year government bond yield is 0.80%. Compare this to, say, the UK, where the cash rate is the same at 0.75%, and the 10-year government bond rate is 0.56% (thanks to BREXIT, theirs is lower). The Australian standard variable home loan rate with the big 4 banks is around 3–4%, while in the UK, home loan rates are around 1.5–2%.
Now, other learned experts will cite other reference points to the interbank lending market, etc., but the fundamental reality is centred around the reasons for the difference, which I believe is largely due to competition. I believe that a heightened landscape of competition could result in a compression of around 0.5% to 1% for homeowners’ loans.
So, what can be done? Well, the simple answer is to remove the broad scope of the bank guarantee to the 4 major banks and instead, use it sparingly for startups in the banking sector, to support them during their early phase of development growth up to a particular point of capitalisation. It’s also important that these startups hit preset growth targets, to make sure that these guarantees don’t remain in place indefinitely.
Of course, these startups would still need to meet the standard regulations that are required within the banking industry, but what it would provide is serious community support to new entrants in this area of the market.
It would also fire a clear message across the bows of the large banks that the Australian Government is weaponising the banking guarantee, because it is tired of the seeing Australian borrowers and savers being ripped off.
The reality with banking is that it requires sizeable capital for any new entrant, and achieving this takes time. There is also the issue of creating peace of mind in consumers that their money is safe as the ADI develops its brand. However, I believe this step could provide the necessary grassroots support to turbocharge a hyper-competitive banking system in Australia.