Big banks generously embrace competition

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From the AFR:

Global rules forcing smaller banks to hold twice as much capital against mortgage lending as the big four is distorting home loan competition, The Australian Bankers Association has said.

In its second submission to the Murray inquiry, the ABA argues the Australian Prudential Regulation Authority should recognise efforts by regional banks to improve their systems and reduce the amount of capital they must hold against mortgages.

The major banks are deemed “advanced” by regulators as a result of their investment in information systems so are able to use their own internally-generated mortgage book risk weights – which average 18 per cent. But the smaller banks must use the “standardised” approach because regulators deem their IT systems sub-standard. Their average mortgage risk weightings are 39 per cent. As the weightings dictate how much equity capital is held against lending, the higher risk weighting makes it less profitable for smaller banks to write home loans.

The big banks have clearly taken the decision to beat a tactical retreat to a stronger redoubt. Greater competition via reduced mid-tier capital requirements can support an argument that too-big-to-fail is diminished as their funding advantage shrinks.

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Of course it is a ruse to help reach their strategic goal, that their own capital requirements are not raised.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.