Tuesday, November 09, 2010

Australia play bait and switch; no pillar talk

The usual suspects are all out talking around the real issue of bank oligopoly written into the 4 pillar policy.

They believe that if you can just tweak a fee or two here or there, they'll have you bouncing from pillar to post, with no real damage done to their bulwark. Fees are easy to adjust here or there. But competition: now that's a curly one.

So toss a few exit fees on the barby, and she'll be right, mate.

Terry McCrann: Bank shopping beware
It looks so obvious. And easy. Abolish, reduce or limit so-called 'exit fees'. What you pay to terminate your mortgage early. But usually payable, only very early, like in the first four years of a mortgage.

So if there's only a low exit fee, or better still no exit fee, people will be -- literally -- free to move.

First little problem. If there are no longer exit fees, there will be -- or should be -- entry fees. Because that's exactly what an exit fee is -- a deferred entry fee.

In the good old days, you paid up-front when you got your home loan for the costs of establishing -- and yes, there are costs to a bank in agreeing to a home loan and setting up -- a mortgage.

Then along came the non-banks, and as a competitive lure, they offered low or zero establishment charges, which would be recouped in the interest paid each year over the life of the loan.

Except if a borrower paid the loan out early: hence very big exit fees. Which the banks then followed in order to remain competitive. [Yes, he said "competitive". Guambat can't believe it. Oligopolistic, really.]

So if you abolish exit fees, you might well undermine the very competition that this whole exercise is supposed to be trying to achieve.

There's not much point doing it, if you enable people to switch from one big bank only to another big bank.

Yes the CBA has just made $6 billion. But that's on $666 billion of assets. It and indeed all the banks make less than 1 of profit on every dollar of assets.

They don't have a lot of margin for error. The one thing worse than a bank making too much profit is one making not enough.

Crucially, it's not just about the banks. The tougher we make it for the banks, the even tougher we would make it for the non-banks.

So the tougher we make it for the big banks, we are likely to create less competition from the non-banks and even the few remaining smaller banks.

This is a much bigger and more complicated issue than simply attacking bank fees and charges. Which is why we need a much broader inquiry into banks and the financial system.

In particular, how to take costs out of the system. How to create real competition.

But wait -- Did Guambat just hear a call for real competition??

Naw, g'wan. Couldn't na bin. He just wants to take costs out of the system. Like pay and perks and what. Never happen. Tell 'em he's dreamin'.

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