REGIONAL BANKS’ SUBMISSION TO THE FINANCIAL SYSTEM INQUIRY LEVELLING THE PLAYING FIELD MARCH 2014 Bendigo and Adelaide Bank is a full service community focussed retail bank with a national network of more than 500 company owned and Community Bank® branches. With 86,000 ordinary shareholders, almost 6,800 employees including Community Bank employees and over 1,500,000 customers, the strategy of the Group is built on a vision of being Australia’s leading customer connected bank. Established in 1874 as the first permanent building society in Queensland, BOQ today has 265 branches across every state and territory in Australia. With 3,000 employees serving over 800,000 customers across the Group, BOQ strives to prove every day that it’s possible to love a bank. Established as Super Member Home Loans in 1994, ME Bank received its banking license in 2001. Today ME Bank is 100 per cent owned by 30 of Australia’s largest industry super funds who collectively have over $200 billion in funds under management. The Bank has over 280,000 customers and $20 billion in assets. Its unique workplace banking model provides customers with banking access conveniently in their place of work. Originally founded as the Queensland Agricultural Bank in 1902, Suncorp Bank is part of the top-20 ASX-listed Suncorp Group and is an ‘A+’ rated regional bank serving more than 1,000,000 customers and employing more than 2,900 staff across 232 retail and business banking outlets and operations nationally. 31 March 2014 Mr David Murray AO Financial System Inquiry GPO Box 89 SYDNEY NSW 2001 email: [email protected] Dear Mr Murray, We are pleased to provide a submission to the Financial System Inquiry. Our submission is the collective effort of four Australian-owned regional banks: Bendigo and Adelaide Bank, BOQ, ME Bank and Suncorp Bank. We see this as a unique opportunity to ensure that Australian consumers, businesses and economic prosperity are the central focus of our financial system. Banks are a major component of the financial system and best placed to assist in managing the flow of capital to consumers and business in support of Australia’s economic growth. These outcomes are best achieved through an efficient and competitive multi-tiered banking system in which each tier brings a different perspective and vigorously competes for customers on a level playing field. Regional banks have served their customers and communities well over time and provide vital competitive tension in the market. The banking system is strong and stable and proved to be very resilient when tested during periods of financial stress such as the Global Financial Crisis. Issues have emerged since the Global Financial Crisis that result in a significant competitive advantage for larger banks. Specific examples include: • The disparity between the amount of capital required to support assets under the Basel capital adequacy framework that delivers a significant advantage to banks accredited under the advanced approach; • The significant funding and cost advantage available to banks deemed systemically important; • The higher cost for regional banks, in relative terms, of the constant flow of new regulatory and prudential requirements; and • Increasing vertical integration of major players in the market. The underlying premise of this submission is to maintain alignment between the needs of consumers, the community and shareholders, and make recommendations that are based on realistic and sound policy principles. The recommendations seek to reinstate a level playing field and ensure long-term competitive tension while preserving the stability of the system. Competition and efficiency drive productivity and economic prosperity. The regional banks look forward to working with the Inquiry to further explore the issues raised in this submission and to develop solutions that provide genuine long-term benefits to the Australian economy. Yours sincerely, Mike Hirst Stuart Grimshaw Jamie McPhee John Nesbitt Managing Director Managing Director & CEO CEO CEO Bendigo and Adelaide Bank BOQ ME Bank Suncorp Bank CONTENTS 1 Executive Summary 5 2 Introduction and background 13 3 Efficiency and Competition Issues in Retail Banking 29 4 Competitive Neutrality - Key Issues and Recommendations 53 5 Pulling the threads together and conclusions – what is the state of competition? 79 6 References 83 1 EXECUTIVE SUMMARY 1 Executive Summary 6 1.1 Stability, efficiency and competition 8 1.2 Greater efficiency through strengthening competition 8 1.3 Efficiency and competition issues in retail banking 8 1.4 Factors impacting competitive neutrality in retail banking 9 1.5 Recommended actions 10 5 1EXECUTIVE SUMMARY 1 EXECUTIVE SUMMARY The banking system has generally served the market well over time. While other sectors of the financial This submission has been prepared by Bendigo and system, such as superannuation funds, may play Adelaide Bank, BOQ, ME Bank and Suncorp Bank an increased role in the provision of capital to the with the assistance of Pegasus Economics. The economy in the future, the banking system will four banks collectively represent a perspective of continue to play a significant and critical role in the Australian ‘regional banks’. The need for a regional intermediation of capital across efficient payment bank submission stems from the desire of these systems. Regional banks will also continue to institutions to make a policy contribution with the contribute to this process by providing competitive aim of ensuring a healthy and sustainable future for tension in the delivery of quality products and Australia’s financial system, with a particular focus on services to consumers, small business, and the banking sector. A healthy, multi-tiered banking regional communities. sector is the best model to guarantee Australian consumers and business will be able to access The Global Financial Crisis (GFC) provides the main innovative and better value financial products and backdrop to the Financial System Inquiry (FSI). It was services into the future. a pivotal event in the economic and social history of many countries. While the Australian economy and A multi-tiered banking system in which each tier financial system proved relatively robust, the GFC brings a different perspective and vigorously has led to significant changes to the motivations and competes for customers, on a level playing field, actions of consumers, businesses, financial institutions will ensure consumer benefits are protected and government. In turn, these have re-shaped much and enhanced. The regional banking sector has of the competitive and regulatory landscape. consistently delivered a better level of service for all Australians as reflected by superior customer Up until the GFC, a relatively level playing field existed satisfaction ratings. The regional banks bring for large banks, regional banks, foreign-owned essential competitive tension to the market through banks, credit unions, building societies and non-ADIs. an extensive and complete range of quality products However post GFC, regulation has tilted the playing and services for consumers, business and regional field materially in favour of the large banks by lowering communities. Regional banks provide genuine and their capital costs, and relative funding and compliance credible choice for customers. costs. The regional banks believe the basic aim of this Inquiry is to put the end-users of financial products as the central focus. Banking system design must, to the greatest extent possible, identify what is best for the mums and dads, businesses and everyday Australians who rely on safe, efficient and innovative services: to save money, purchase a house, start a business and all the other hundreds of things that people need a banking system to assist with. 6 LEVELLING THE PLAYING FIELD EXECUTIVE1 SUMMARY The current reality is that while there is competition Submission outline in the market and there are many beneficial aspects to Australia’s banking system, issues have emerged The submission is organised as follows: - the banking landscape is now characterised by a Chapter 2 provides an introduction and higher degree of market concentration, consolidation background. It covers the role and importance and increasing dominance of the large banks of regional banks as competitors, makes high relative to other providers. While smaller banks and level comments on the GFC, and discusses the others provide customers with real alternatives and policy objectives commonly used to base financial choice when it comes to financial services, these regulation. smaller participants do so at a distinct competitive disadvantage. Chapter 3 identifies some evidence to indicate that efficiency and competition in retail banking The regional banks believe now is the time to is not optimal and thereby establishes a primary identify, acknowledge and discuss these issues in a motivation for making improvements. constructive way with a view to improving the system for the future. The best means of mitigating the trend Chapter 4 outlines some reasons as to why towards further dominance is to refocus banking efficiency and competition in retail banking is regulation. Competitive neutrality is about ensuring all not optimal and makes recommendations for service providers compete on an equal footing and improving current arrangements. Specifically, this that regulatory arrangements do not favour some section identifies the capital adequacy regime, service providers over others. A small number of “too