Powered by MOMENTUM MEDIA
the adviser logo
Growth

Small banks have ‘major disincentive to growth’

by Nick Bendel10 minute read
The Adviser

The federal government has been warned that existing capital rules reduce the incentive for smaller banks to challenge the big four.

CUA chief executive Chris Whitehead told the Financial System Inquiry that the mutual banking sector is at a disadvantage because it has to apply different risk weighting for loans.

“The major banks gain excessive benefits by applying the internal ratings-based (IRB) risk weighting approach compared to other [banks] which are required to use the standardised approach,” he said.

“The practical effect is to require mutuals to apply twice as much capital against a home mortgage as a major bank.”

==
==

Mr Whitehead said the result is that CUA is “effectively required to carry a major disincentive to growth in its battle with the big banks”.

That is despite the fact that CUA has “an excellent record on loan delinquencies compared to the major banks” and has “safeguards and systems sufficient to satisfy the rating agencies”.

The solution is for APRA to work closely with smaller banks to help them achieve IRB accreditation, Mr Whitehead added.

“No weakening of IRB standards would be required, rather a gradual increase in the risk assessment capabilities of the sector, reducing the risk weighting disadvantage over an agreed timeframe,” he said.

“This would be a boost to the mutual sector, demonstrate that the government is keen to level the playing field, and give an incentive to the institutions involved to undertake the necessary investment in systems and people.”

People’s Choice Credit Union managing director Peter Evers also called for a recalibration of the risk weighting allocations for mortgages.

“APRA has got a mantra around financial stability and competition and so on, and competition seems to have lost its focus,” he said.

“It is not fair at the moment – it’s imbalanced. The majors have such a substantial advantage that, tied to their market power, they are just compressing what would otherwise be genuine competition.”

[Related: CUA challenges bigger banks after record results]

default
magazine
Read the latest issue of The Adviser magazine!
The Adviser is the number one magazine for Australia's finance and mortgage brokers. The publications delivers news, analysis, business intelligence, sales and marketing strategies, research and key target reports to an audience of professional mortgage and finance brokers
Read more