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Australia Must Call Inquiry Into Financial System, Deloitte Says

Australia’s biggest banks have an unfair competitive advantage over their smaller rivals, Deloitte Access Economics said, urging the government to order an independent inquiry into the nation’s financial system.

Credit unions, building societies and customer-owned banks, or mutuals, are struggling with increased regulatory and funding costs following measures designed to stabilize the financial system during the 2008-2009 global crisis, the Canberra-based firm said in a report released today.

“The major banks are implicitly guaranteed against failure due to their importance to the financial system,” the company said, citing estimates of the value of the “too big to fail” guarantee at between 10 basis points and 50 basis points. “Perversely, this may encourage the major banks to undertake riskier lending.” One basis point equals 0.01 percentage point.

Australia’s banks are increasing their reliance on retail investors, with deposits as a proportion of funding requirements climbing to the highest level in 14 years, according to the Reserve Bank. With access to wholesale funding markets disrupted in the wake of the global crisis, larger lenders are competing more intensely to attract domestic deposits due to their stability and relatively lower cost, Deloitte said.

Effect on Consumers

Smaller Australian lenders emerged from the global crisis in “reasonably good shape” due to their prudent lending standards and conservative attitudes toward risk, said the report, which was commissioned by a body representing the Australian customer-owned financial services industry. Their reliance on deposits rather than wholesale markets for funding minimized the impact of the crisis, it said.

Deloitte called for the government to commission a review of the Australian financial system along the lines of the 1996-1997 Wallis Inquiry. It said a banking system that isn’t competitive will have significant implications for consumers.

“Lack of competitive pressures will lead to higher prices for services, limited choice, and ultimately lower levels of borrowing and deposits for consumers,” according to the report. “Without competition, there will also be weaker incentives for innovation and improvements in products/services. A diminished presence for mutuals will reduce choice and access to financial services in Australia. The major banks will become even more ‘too big to fail’.”

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