Australia's government unveiled reforms to boost bank competition on Sunday, allowing lenders to issue covered bonds for the first time and cracking down on interest rate signalling under a package designed to calm voter anger at rising mortgage interest rates.
Treasurer Wayne Swan said the reforms aimed to help mutual credit unions and building societies become a fifth pillar of Australia's finance sector, by making it easier for customers to leave the big four banks which currently dominate the home loan market.
The reforms aim to help unlisted credit unions and building societies access funding and customers, but analysts say they are unlikely to seriously hurt the profitability and share values of the major banks. "Most of what has been announced has been flagged or leaked. I don't think there is anything really new or earth-shattering here, so I don't see a huge reaction," said RBS bank analyst John Buonaccorsi.
"But certainly over time, it will lead to slightly cheaper housing loans, because covered bonds are cheaper funding. But it is not going to cause a dramatic difference."
Australia's four major banks, the Commonwealth Bank of Australia , National Australia Bank , Australia and New Zealand Banking Group and Westpac, currently control around 87 percent of Australia's $1.1 trillion home loan market.
Shares in the top four banks have slightly underperformed compared to the benchmark index since plans for the bank reforms were first mooted in November.
The Australian Bankers Association, which represents the major banks, said some of the reforms would increase competition, but warned some regulatory changes, such as scrapping loan exit fees, could hurt smaller lenders. "Regulatory interventions may be politically popular but risk being counter-productive. Exit fees reflect legitimate costs of mortgages and banning them will hurt small lenders," Association chief executive Steven Munchenberg said.
Swan said the government would invest a further A$4 billion ($3.94 billion) in residential backed mortgage securities, a key source of funding to small lenders, would allow more "bullet bonds" for small lenders, and would scrap mortgage exit fees charged by large banks.
He said the government would also increase the powers of the competition regulator to prosecute any collusion among banks through interest-rate price signalling, and will ask former Reserve Bank of Australia governor Bernie Fraser to examine whether it is possible to have portable bank account numbers.
"Vigorous competition is the best way to keep interest rates for borrowers lower over time and create a system that offers real choice," Swan said. Swan announced the move to reform the sector in early November in response to growing public anger at rising mortgage rates, with the main banks all lifting rates above official central bank rate hikes and citing the higher cost of funding on international markets.
Australia's banks are among the most stable and profitable in the world and survived the global financial crisis largely unscathed, thanks in part to an early government guarantee on large deposits and wholesale funding.
Australia's top banks rely on offshore debt for a quarter of their annual funding needs and have defended their move to raise rates faster. They have said the sector has enough competition, though the share of smaller lenders has crumbled.