DEPARTMENT OF MANAGEMENT James Cook
University of
North
Queensland
A DISCUSSION ON THE REGULATION & DEREGULATION
OF THE HOME LOAN INDUSTRY IN AUSTRALIA
MBA RESEARCH REPORT
submitted by
Darren Charles Lelliott B.Com
in January 1997
1996 in partial fulfillment of the requirements for the Degree of Master of Business Administration in the Faculty of Commerce and Economics
A DISCUSSION ON THE REGULATION & DEREGULATION
OF THE HOME LOAN INDUSTRY IN AUSTRALIA
Dissertation Submitted By
Darren Charles Lelliott B.Com
in January 1997
in partial fulfilment of the requirements for the
Degree of Master of Business Administration
in the Department of Management of
James Cook University of North Queensland
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II
DECLARATION
I declare that this dissertation is my own work and has not been submitted in any
form for another degree or diploma at any university or other institution of
tertiary education. Information derived from the published or unpublished work
of others has been acknowledged in the text and a list of reference is given.
Darren Charles Lelliott
January 18th, 1997
II III
I, the undersigned, the author of this dissertation, understand that James Cook
University of North Queensland will make it available for use within the
Department of Management and, be microfilm or other photographic means,
allow access to users in other approved libraries. All users consulting this
thesis will have to sign the following statement:
"In consulting this thesis I agree not to copy or closely paraphrase it in
whole or in part without the written consent of the author; and to make
proper written acknowledgment for any assistance which I have
obtained from it."
Darren Charles LELLIOTT
18
th January 1997
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ABSTRACT
This discussion is made up of several elements. The first is background on the
periods of Regulation and Deregulation. It attempts to concisely cover the
period giving key dates for important development, legislation, and
implementations. A background knowledge is necessary before being able to
discuss the implications of deregulation on the industry.
Chapter two opens up the discussion on Post-deregulation competition. It is
this competition that was seen as one of the main benefits sought from the
deregulation of the finance industry. Post-deregulation competition breaks
down the effects as they have been felt by sectors within the industry. It is
divided into Banks, Credit Unions, Securitisers, and Other Finance providers.
A full discussion on the benefits sought and those gained thus far is made.
Part of the competition benefits to the consumer include the differentiation of
products that banks have undertaken to give themselves some market advantage.
Banks have lost some market share in the last two years of intense competition
and have been utilising marketing strategies to avoid further losses. Chapter 3
discusses these marketing strategies and how they have been effective, and how
some have just been negated through further government regulation.
Of course to the consumer it is the bottom line benefit that they want to see. To
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V
measure these benefits or disadvantages to deregulation measures of Spread and
Fees have been taken. There is then a comparison of those Spreads and fees for
banks and other financiers against comparable foreign banks, this is a Reserve
Bank research piece that has found. Australian banks are well ranked on both
measures.
As stated in the marketing strategies segment there has recently been a degree of
Re-regulation over the industry. Much of the new regulation and controls affects
all consumer loan providers, however, some of it only applies to the banks.
Chapter 5 discusses these new regulations and how they have already started to
reshape the face of competition by avoiding the 'honeymoon' loan strategy of the
banks.
My conclusion is a discussion of where I foresee the future of the home loan
industry. It is sometimes difficult to separate the home loan industry and the
finance industry as a whole and in chapter 6 I have largely incorporated a
discussion on the two as being synonymous. In the future I expect the industry
will see integrations, mergers, and more rapid technology adoptions. For the
customer it seems apparent that some benefits will be gained in mid-term through
competition and further contractions in margins, fees or both. We will also see a
change to the banking industry fee structures for other products, such as
transaction accounts. In the near future they will have to become self funding and
profit making or else they will become extinct. In the face of current and
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TABLE OF CONTENTS
Chapter No. Page No.
INTRODUCTION
1 REGULATION AND DEREGULATION - AN OUTLINE OF THE EVENTS
Regulation Deregulation
1
1
2
2
2
2
4
4
4
6
6
6
6
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- 3
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- 4
- 5
- 6
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- 7
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2 POST-DEREGULATION COMPETITION
Banks
Credit Unions Securitisers
Other Finance Providers
3 A MARKETING DIFFERENTIATION
4 QUANTITATIVE MEASURES OF COMPETITION
Spread
Fees
International Comparison
5 RE-REGULATING THE MARKET
6 CONCLUSION - FUTURE DEVELOPMENTS FOR THE INDUSTRY
Integration
Mergers
Future of Non-Bank Lenders
Future Developments for Customers
APPENDICES
BIBLIOGRAPHY
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APPENDICES
Appendix No.
1 Timeline of the Banking & Finance Sector in Australia:
Since 1911
2 Timeline of Non-Bank Financial Intermediaries in Australia:
Since 1920
3 Table 1: Assets of Financial Intermediaries:
1929 - 91
Table 2: Assets of Financial Intermediaries:
1992 - 96
4 Table 1: Bank Market Share of Owner-Occupied Home Loans
5 Table 1: Simple Bank Spread:
Variable Rate & 90 day bill rate
Table 2: Simple Bank Spread:
Variable Rate & 6 month fixed rate deposit
Table 3: Simple Spread:
Mortgage Managers & 90 day bill rate
6 Gross Interest Spreads:
Major Banks, average for year
1
INTRODUCTION
A DISCUSSION ON THE REGULATION & DEREGULATION
OF THE HOME LOAN INDUSTRY IN AUSTRALIA
The following chapters comprise a discussion that has transpired as a result of researching the
current environment of the home loan industry.
My original research was to have been centred around creating a knowledge base from which I
could make educated guesses for the future of home lending, in particular to increase my
ability to better service my own customers in my occupation as lending officer.
When I commenced this generalised investigation of the industry I found that there was no
single concise source for references. So it was decided that a more expanded investigation was
necessary.
To really understand the present industry environment, and hopefully the expectations for the near
future, it was necessary to understand the industry history. I have been fortunate and have found a
combination of references that followed a chronological order of developments in Australian
financial industry history. The Timelines at Appendix 1 & 2 were originally compiled to allow me
quick reference while writing report. I have found these appendices quite helpful and thought it
advantageous for the reader if they were included.
The investigation of the industry history led me to the sources of information I needed to
formulate my understanding and expectations as outlined in the report.
2
I have drawn heavily on the Print Media, for up-to-the-moment reporting, and the Reserve
Bank Bulletins for statistical data and analytical frameworks. Working in the industry and
being a member of an industry body, the Australian Institute of Banking and Finance, has
certainly been of benefit.
Chapter 1 Regulation & Deregulation
3
1 - 1
1 - 2
CHAPTER 1
REGULATION & DEREGULATION
REGULATION
In 1937 the Royal Commission into the Monetary & Banking System, instigated as a result of the
Great Depression, tabled a report that would mould Australian Banking for the next generation and
a half. The commission recommended that "the most desirable banking system is one which
includes privately owned trading banks... [and] in which a strong central bank regulates the
volume of credit and pays some attention to its distribution". The Royal Commission's findings are
acknowledged as the beginning of the Regulation phase.
Economists throughout Australia and other Western Nations were desperate to ensure that
there could never again be another Great Depression. To do so it was widely believed that
government regulation would allow for greater control of factors causing a depression and
could therefore avoid another repeat of the Great Depression.
Of course with the Commonwealth Government having previously created the Commonwealth
Bank in 1911 and used it in a Central Reserve Bank role, after the 1930 passing of the Reserve
Bank Bill, it was immediately recognised as the obvious candidate to implement any further
central banking regulations and would do so for some time, much to the dismay of many of the
privately owned competition.
Chapter 1 Regulation & Deregulation
In 1941 the Prime Minister John Curtin introduced the National Security Regulations, requiring
Chapter 1 Regulation & Deregulation
4
all licensed banks to place funds in a special account with the Commonwealth Bank and
supply it with specified information and to comply with its policy on advances. The deposited
funds were seen as protecting the depositors in a bank. If it became necessary they would be
available to make refunds back to depositors. During the Second World War these deposited
funds were given an interest rate as set by the Commonwealth Bank, interest rates were
carefully chosen, ensuring they did not exceed the interest rate received prior to the war.
In 1942 the Commonwealth Bank, in the role of Central Bank, was given the power to set
maximum interest rates, this applied to all deposit and loan funds and for the Home Loan Industry
can be seen as the true start of Regulation. 1945 The Banking Act was passed limiting a trading
bank's ability to offer certain product types to consumer business. From 1956 to 1962 existing
retail banks established Savings Bank subsidiaries to counter this effect.
After much political lobbying by the privately owned banks 1959 saw the passing of the
Reserve Bank Act. The Act provided for the splitting of the Commonwealth Bank into the
Commonwealth Banking Corporation and the Reserve Bank of Australia. It was felt that as
both the central bank and a trading bank the Commonwealth Bank had unfair trading
advantages over competitors.
In 1963 Dr James Vernon, of the Committee of Economic Inquiry, stated "Non-bank financial
intermediaries..reduced the effect of monetary policy decisions and accordingly a means of
formal regulation should be devised" (House of Reps 1991). Although the Non-Bank Financial
Chapter 1 Regulation & Deregulation
5
Intermediaries (NBFIs) had been regulated under the Capital Issues Regulation of 1941 this
regulation was only intended to control the setting of maximum interest rates during the years of
the Second World War. It subsequently expired in 1952 and was not reviewed or a replacement
ever implemented. Therefore the NBFIs, in particular pastoral companies and finance companies,
have not had to comply with the same level of regulation as the banks.
DEREGULATION
For the banking segment of the Home Loan Industry deregulation became effective in 1985
and 1986, however, for the finance industry deregulation started in 1973 with interest rate
ceilings being removed from certain deposit products.
In January 1979 The Campbell Committee was established to inquire into the Australian financial
system. In September 1981 the Committee's final report was submitted. The Campbell Committee
found that 'the community, while recognising a government responsibility to ensure stability and
confidence, was nevertheless receptive to the prospect of a more open and flexible financial
system, substantially free of intrusive government controls and regulations' (House of Reps 1991).
This finding, which had been hinted at in the initial brief to the Committee, was to open the way
for Australia's finance industry deregulation and the current financial environment.
The election of a new Labor government 1983 saw the creation and quick resolution of the Martin
Review Group. This group reviewed the Campbell Committee findings and found in favour of their
recommendations for deregulation. In late 1983 the Australian dollar was floated in a
Chapter 1 Regulation & Deregulation
6
1 - 4
spectacular display of deregulation initiatives, including the deregulation of the Australian Stock
Exchange.
1985 provided the removal of interest rate ceilings on home loans, except for owner-occupied
housing loans of amounts less than $100,000, and 1986 removed all other home loan interest rate
ceilings, while also removing all distinctions between Trading and Savings banks. These
moves in 1985 and 1986 are arguably the most important new development for the Home Loan
industry since the 1942 setting of maximum interest rates.
It was expected that the deregulation of the industry would allow for greater competition and the
result would be for greater benefits to flow on to the consumer. It was envisaged that these benefits
would come primarily from the lowering of interest margins (discussed in a later section) and
therefore a reduction of real interest costs to the consumer. What was also expected was an increase
in service and product options, but the rate of option increase was probably not equal to that seen
today.
Deregulation has been reviewed by the House of Representatives Standing Committee on Finance
and Public Administration in 1991 and 1992, and its benefits and disadvantages are cause for many
debates between Economists or lay-persons throughout Australia. When assessing the effects of
deregulation I feel the presiding Governor of the RBA, Mr Fraser, summed it up as such "In
assessing its effects, we should remember that deregulation has existed for less than a decade [at
the time of the speech], after several decades of regulation." (Reserve Bank Bulletin 1991).
Chapter 2 Post-deregulation Competition
7
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CHAPTER 2
POST-DEREGULATION COMPETITION
As previously stated one of the motivations for deregulation was to open the financial services
markets to the effects of market competition, but has this happened?
BANKS
Appendix 2 provides a breakdown of the Assets of Financial Intermediaries from 1929 to the
present. In the context of competition we must assume that measuring the sector's Assets
provides a strong indication of the percentage of business being performed in the financial
industry. It is also acknowledged that this gauge does not break down the figures for product
types, e.g. Home Loans, deposit accounts, Bank Bills. However, we can assume that the
percentage of Asset ownership is indicative of percentages of dominance in the common
product areas. This assumption will not always work as for example it is unlikely that Money
Market Corporations will have a large market share of Consumer Home Lending products.
If we first examine the Banking industry we can follow a trend that has taken the banks from
almost complete dominance of the financial industry in the 1920s, to the period following 1936
where we see the Banking sector loose Asset dominance to the NBFIs, particularly the finance
companies. This loss of Asset shares can be closely traced along the period of regulation where
the banks had to conform to the regulations placed upon them while the finance companies were
unregulated after the expiry of the Capital Issues Regulation in 1952. As of 1959 all Australian
Chapter 2 Post-deregulation Competition
8
2 - 2
Chapter 2 Post-deregulation Competition
Banks had an interest in a finance company in an effort to circumvent the banking regulations.
The lowest period of banking sector percentage ownership of industry assets occurs between
1970 and 1991. After the deregulation measures of the early 80s the banking sector gains market
asset percentages, however, the sector has never again climbed above 80% industry asset
ownership.
Finance companies and building societies enjoyed the most growth during the late stages of
regulation and both have subsequently lost asset percentages in the wake of deregulation. Over
the changing financial and societal environment of the last 20 years pastoral companies have
gone into decline and credit unions have sprung up in their place.
The area of most interest in the face of increased competition through deregulation is the
category of 'Other' which steadily grew in asset position and then declined again.
For the purposes of a discussion on Home Loan market share the Assets measure may also fail
when we take into account the rise of Mortgage Securitisers. Mortgage Securitisers (Mortgage
Managers) will be discussed in the next section.
Mother indicator of the trends in the market is appendix 4. This shows the 'Bank Market Share -
of owner-occupied Home Loans' for the industry. This data was collected from several issues of
the RBA Bulletin and only breaks down the information into total figures and the dollar value
financed by the banking sector.
Banks have been following a steady trend, increasing total market share since the early 1980s.
Chapter 2 Post-deregulation Competition
9
2 - 3
2 - 4
The low of 50% during the 70s would have been at a time when the banks were regulated and
had Savings and Trading Bank distinctions. During the 70s the building societies held around
30% of the market, and insurance companies, which played a major role then but slipped out of
the market until recently, held between 10 - 15%.
At this time it is not possible to deter crone if the 94 - 96 decrease is the turning point for market
share or Wit is another cycle. These figures and the growth trend for banks is significant in that
although there has been much discussion on the margins and overall profitability of the banks
the percentage of market share continues to grow. The House of Reps Standing Committee (A
Pocket Full of Change, 1991) had this to say about the level of competition and margins.
'The main influence on margins is the degree of competition for providing deposits and
loans in a given market. However, as the scope of the banking market has broadened
over the 1980s, a finding that interest margins have increased somewhat would not
necessarily imply that borrowers are being exploited It may be a reflection of banks
lending for riskier proposals now that they are no longer rationers of credit. These
riskier proposals may previously have been funded by finance companies or money
market corporations.' (House of Reps 1991).
For a full discussion on margins refer to the section 'Spread'.
There has been some movement in the industry with strong competition being waged by the
mortgage managers, insurance companies, and other bodies we have seen particularly active in the
industry. But does this mean that there is significant movement away from the banks. An article in
Chapter 2 Post-deregulation Competition
10
2 - 5
the Townsville Bulletin (17/4/96) would have us believe that 'Home buyers desert banks in droves.
This article reported that 'housing finance approvals rose by 2.9 per cent in February
[1996]...finance approvals by banks grew by only 0.3 per cent in February compared with a 17.8
per cent increase for other lending institutions - a 49.3 per cent improvement since January last
year'. If we look at appendix 4 again these figures can be substantiated for early 1996, however, are
they signs of a long term swing away from the banks or merely the downside of a cycle?
CREDIT 'UNIONS
As previously stated the credit unions were the second largest market shareholder in the owner-
occupied home loan market during the seventies, with market share fluctuating between 28 and
33%. During the 80s, with the deregulation of the banks, credit unions rapidly lost ground to
other institutions particularly the banks. In 1994 the banks were holding almost 91% of the
market share leaving 9% to be divided between credit unions, finance companies, and others.
Since the 94 peak the banks have dropped back to 84% in 1996 and we know that the mortgage
managers now hold 9% of the difference leaving 7% to the rest (these figures are the
interpolation of data provided by the Reserve Bank over the period 1970 to 1996).
In April 1996 the Credit Union Services Corp of Australia Ltd attempted to raise funds in the
bond market to enable its member credit unions to offer cheap home-loans. Unfortunately this
failed and the credit unions do not seem to have recovered. They cite the banks and mortgage
managers as being the main cause of their market share erosion. There is some indication that
Chapter 2 Post-deregulation Competition
11
credit unions will move to establish themselves as mortgage securitisers in order to continue
operating in the home loan market.
SECURITISERS
Mortgage Securitisers (Mortgage Managers) take parcels of Home loans and offer them to
wholesale investors secured by mortgage securities. In recent years these securitisers have risen
to take on the Banks in competition for Home Loans. Mortgage managers are the exciting
development in the home loan industry. They have made rapid inroads into the market shares of
many of Australia's traditional home lending sources. The banks appear to have been caught
unprepared for them, as do the credit unions and finance companies. They could be compared to
a Scottish terrier gnawing at the leg of a Stegosaur. They are small, able to adapt quickly due to
their size, operate at very little cost and do not bear any of the liability associated with the home
loan.
For example a Securitiser will seek the business of home buyers until they have parcelled together
the borrowing requirements for $1 million of home lending. The securitiser then offers this $1
million worth of debt, secured by mortgages and mortgage insurance policies (home lending where
the borrower has less than 20% equity in the loan securities is secured by mortgage insurance) on
the wholesale investors markets. Although the spread, in this case being the difference between the
interest rates paid by the home buyer and the rate at which the wholesale investor purchases the
parcel, will be less than that of the banks, difference between interest rates given to depositors and
that payed by borrowers, the securitisers are able to benefit through low operating costs.
Chapter 2 Post-deregulation Competition
12
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Securitisers are able to maintain low operating costs, compared to banks and other NBFIs,
because of the branch networks and high levels of staffing these other institutions have.
Furthermore as the Securitiser is not the direct provider of funds, nor the holder of the
security, they do not maintain the debt burden on their balance sheets, this is borne by the
wholesale investor.
In effect the Securitiser is no more than the middleman between the home lender and the
wholesale investor. They conveniently package together parcels and are paid a managers fee.
This simple strategy, that works so well in an environment where wholesale funding can be
raised at relatively inexpensive rates, has seen the mortgage managers move from a market
share of 1% four years ago, to their current 9% market share in 1996. Aussie Home Loans,
a mortgage securitiser, is ranked in the top 5 home lenders in Australia writing $250
million worth of business per month.
OTHER FINANCE PROVIDERS
The home loan market has long been regarded as an attractive area for financiers because of the
high margins obtainable compared with other finance products. This attraction has seen many
sources of finance come and go. In today's environment of post-deregulation competition we are
seeing new operators and the return of some that had otherwise almost dropped out of the
market completely. We can now obtain housing finance from domestic or foreign banks, from
mortgage securitisers, from life offices, unions, and solicitors.
Chapter 2 Post-deregulation Competition
13
Life Insurance offices used to operate at up to 25% of market share during the 60s decreasing
in the 70s to 5%. During the 1980s they virtually left the market but they are now making a
comeback. They have been attracted back to the industry because of the high margins, the
inexpensive and readily available funds they can tap into and the because of the changes that
have occurred in their industry resulting from competition. Life offices are now waiting for the
outcome of the Wallis Inquiry and the implications for their being able to operate in the finance
markets. If they are given the all clear then we may see mergers, take-overs, or simply the
existing operations expanding to perform more of the traditional banking operations.
Many of the 'Other' category of home loan financiers operate at margins allowing them to
undercut the banks so why are banks still able to maintain their market share, or at least not
lose it in the volumes that would be expected? To answer this we must consider what is really
on offer, that is a home loan is not simply a home loan and a lot of the decision comes down to
what I classify as the Marketing.
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Chapter 3 A Marketing Differentiation
14
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CHAPTER 3
A MARKETING DIFFERENTIATION
As noted under 'Competition' the mortgage managers, unions, solicitors and other market share
takers are able to operate at lower costs than the larger and higher operating cost banks and
credit unions. So why do these latter sectors still maintain such a large share of the market
when the others outperform them on costs?
Historically the simple answer has been for the banks to outperform the NBFIs on services and
product range. Banks are able to 'Tailor' a package of products to the home buyer from their
stables of other banking facilities. They can offer discounts on these other products to new
customers and entice them into the market.
The RBA found that, in an effort to maintain the banks market share, they were offering three
product benefits that mortgage managers had not been able to meet.
1. 'Honeymoon' loans. These loans operate on a discounted initial interest rate, designed to
attract the home lender. At the end of the term of discounted rate the interest would return
to normal customer rates. For example a customer may go onto a 12 month fixed interest
rate of 7.5% while the normal fixed interest rate was 9.50%. A honeymoon loan normally
tied borrowers into the deal in an effort to ensure some customer stability. These conditions
varied between banks, but normally worked on a five year term. This way the customer
would take the 7.50% for 12 months and then convert to the standard variable interest
3 - 1
Chapter 3 A Marketing Differentiation
15
3 - 3
rate for the remaining four years of the term. If they sought to refinance during this
term they would be required to pay a fee for breaking the terms of the contract, a
prepayment fee. This product variant has now changed and will be discussed further in
'Reregulation'.
2. Fixed-rate loans. As mortgage lenders have been unable to offer fixed rate loans this
product is a further benefit to the banks. Using a fixed rate, customers are able to ensure
that their repayments will not increase during the term of fixed rate. This gives them the
benefit of being able to budget for the fixed term. For the banks it means providing a
guarantee that the customer finance will be held for the fixed rate term, allowing greater
planning of funds and providing the bank greater scope to compete at the margin for new
customers.
3. 'Basic' variable-rate loans. These 'no-frills' options allow the banks to attract new
customers with rates below the standard variable-rate. The banks can afford to do this
in an effort to attract customers for some categories, as they can cross-subsidise this
product group with other products. This is seen more as an aggressive marketing tool
designed to gain back market share from other finance providers than it is as a revenue
gaining source. These products are as the name claims 'basic' and often come with none
of the associated benefits of discounted banking products such as redraw facility,
savings accounts, credit cards, etc.
To a lesser extent the regional banks have been offering special deals based on geographical
area. These offer discounted rates in a new area compared to the rate offered in the banks home
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Chapter 3 A Marketing Differentiation
16
3 - 4
area. This is another aggressive marketing tool that aims to gain quick market share in a
geographic location.
It may be noted that a lot of the focus for these products has been the maintaining of customer
loyalty. The reason, (RBA Bulletin June 1996) is that 'in mid 1991, 8 per cent of loans for
established houses were refinancing, but this figure is now around 28 per cent'. A customer
migration rate of 28% for established dwellings is a further indicator of the level of post-
deregulation competition. It is also a warning to industry players that they can gain and lose
market share extremely quickly in the current competitive environment.
It has already been said that the product differentiation has been the level of service and associated
products banks can offer, over those offered by non-bank lenders. The non-bank lenders are now
taking steps to overcome these limitations and, with recent developments, may have come a long
way in doing so. The Weekend Australian (Kavanagh, J 1996) reported that 'non-bank home loan
providers are shedding their no-frills image. after Sydney-based Financial Directions Australia
launched a home loan package that includes redraw facilities, a line of credit and a facility for
switching between variable and fixed'. If all mortgage lenders are soon able to do similar loan
packaging then the bank advantage, already held, will reduced.
Along with the marketing aspects of post-deregulation competition comes another new player
for the industry: the referral partner.
With competition heating up and competitive advantage being depleted all industry players will
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Chapter 3 A Marketing Differentiation
17
be looking for new advantages to keep them ahead. Realtors are now standing up and pointing
out to industry players that they are integral to the majority of home purchases. So what does it
mean? Home lenders will need to reinforce their positions with these referral sources in order to
get a competitive advantage. Unfortunately for the banks, the realtors have realised the
competitive advantage they have and the relatively inexpensive cost of originating the finance
themselves. If this trend of realtors acting as originators continues, it will add to the competition
faced by banks, and further reduce the competitive advantage they currently enjoy.
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Chapter 4 Quantitative Measures of Competition
18
4 - 1
CHAPTER 4
QUANTITATIVE MEASURES OF COMPETITION
It is very good to be able to say that competition has been encouraged into the Australian
finance industry, or that qualitative measures might indicate a level of competition that has not
before been seen in Australia. But it is always the quantitative measures of any benefits from
competition that must prove or disprove the benefits of deregulation. In this chapter, two
quantitative measures of competitive benefit are discussed. Of course to the consumer there are
two benefits sought from competition and they are cheaper housing loans, and a greater choice
of product. The issues concerning the product are covered under the title of Marketing this
section talks about the bottom line differences for the consumers home loan cost. To measure
these costs to the consumer, spread and fees must both be considered.
SPREAD
'Despite considerable publicity suggesting that increases in customer margins have been large
and widespread, evidence available to the Reserve Bank suggest that they have been minimal
and have had little effect on banks' average interest spreads' RBA Bulletin 1992.
Spread or Margin (the terms are used interchangeably in the literature) is the difference taken
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Chapter 4 Quantitative Measures of Competition
19
4 - 2
4 - 3
between the rate of interest paid by the lender for funds and the rate of interest received on those
funds. This may seem like a simple discussion and is commonly misinterpreted as being such. For
example many journalists quote spread on Variable Rate Home Loans(VRHLs) as simply being
the difference between the Variable loan rate of the day and the 90 day bank bill rate, as is shown
in appendix 5. or the difference between VRHL and a chosen statement or deposit account. Again
appendix 5 gives an example of 'VR and the 6 month fixed deposit rate. Dr David Clark of the
University of NSW provides an example of 'The Interest Rate Margin Which Interests most
Australians - Difference between average home loan rates and 3 month, fixed-deposit rates' in his
Economic Briefing (AFR 19/6/96). Surprisingly, although this measure is overly simplistic and
may have been thought to be a matter of scare tactics, the graph provides a margin starting at less
than 2% in 1960, peaking at just over 4% in 1992 and dropping back to about 2.5% in June 1996.
This simplistic view of Margin is actually better than the measure of Average Gross and Net
Margins as preferred by the Reserve Bank.
The problem with taking a simplistic view on margins is how do we know which product and
term to choose?
It is not as simple as saying that all of the money used to provide Home Loans by banks is gained
only from the 3 month fixed-deposit market. These funds are in fact gained by a combination of
all of the revenue raising sources a bank utilises. From simple statement accounts, to fixed-
deposit products, through to treasury raised capital.
In 1991 the Reserve Bank of Australia(RBA) was requested to provide an update on the effects
of deregulation to the House of Representatives Standing Committee on Finance and Public
Administration. To do so the RBA investigated simple measures of spread and found them
inadequate, for the reason previously given. Instead the RBA had to ascertain the Gross and
Net Average Margin for the banking industry.
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Chapter 4 Quantitative Measures of Competition
20
4 - 4
This pie graph shows that for the deposit funds sources from the Australian banking sector
there is no simple source from which to base a measure of spread.
Table 4.1: Breakup of Deposit Funds
Source: Reserve Bank Bulletin June 1996.
It was found that the pattern was the same for the data up until 1996. If we further consider
that, within each of the above deposit sources, there will be several products, it exacerbates the
case against such a simple measure of spread.
What is the Gross or Net Interest Spread? The Net Average Interest Spread is measured by the
difference between the average interest rate received on all loans and investments (including non-
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Chapter 4 Quantitative Measures of Competition
21
4 - 5
accrual loans) and the average interest rate paid on deposits (including zero-interest deposit
accounts) and other interest-bearing liabilities. Gross Average Interest Spread differs from the
Net Average Interest Spread as non-accrual loans and zero-interest deposit accounts are not used
in the calculation. The difference in real terms can be quite significant, dependent on the level of
debt write-offs an institution maintains. For example, the difference between Gross and Net
Spread during the early 1990's would have been more pronounced than that of today.
Appendix 6 shows the calculations for the Gross Average Margin from 1980 through to 1993.
These figures have been calculated by the RBA. Unfortunately, due to the difficulty in
obtaining and interpolating the Gross Average Margin, there is no indication for the period
subsequent to 1993. A period which may reveal, in Margin terms, the most intense period of
competition and possibly a significant decrease in margins.
The House of Reps Standing Committee (A Pocket Full of Change, 1991) found that 'the
aggregate interest spread has been on a downward trend during the 1980s, interrupted only by
the rush of funds into the banks after the 1987 sharemarket crash". If we compare this trend
against the simple spread analysis in Appendix 5, of the VRHL against the 6 month fixed rate,
then we can find comparable downward trend over the last four years, with a margin wavering
around the 4% level.
The Standing Committee of 1991 also noted the following 'in the early years.. [the regulated
period].. the housing loan rate was subject to a ceiling and while loans were cheaper they were
harder to obtain. Many borrowers had to top up housing loans with expensive personal loan
3 - 1
Chapter 4 Quantitative Measures of Competition
22
4 - 6
rates or loans from finance companies and so the average rate paid exceeded the advertised
housing loan rate'. Taking this increase in spread into consideration it would indicate an even
greater benefit having been gained from deregulation. To the consumer these trends provide
quantitative evidence that there has been some benefit gained through deregulation and the level
of competition achieved.
A procedure we have witnessed in recent history has been the reduction in home loan rates for
new borrowers while there is a lag in the time until this change will be felt by existing borrowers.
In 'A Pocket Full of Change' the Standing Committee investigated these occurrences and reported
that such lags were carried out for the following reasons:
1. Stability of interest rate. For the customers benefit the banks decide that they will wait
to ensure that the interest rate decrease is sustainable before amending existing
customer rates.
2. The margin rate will move much more slowly than the home loan rate, as banks raise
much of the funds from long-dated fixed rate deposits.
3. Banks, attempting to recover from bad and doubtful debts, will lag adjustments
downwards. This lag will result in some financial margin benefit to the bank, helping to
recoup such debts.
FEES
3 - 1
Chapter 4 Quantitative Measures of Competition
23
The other quantitative measure to the consumer is the costs they must incur in fees.
There are a number of perspective on the fees issue to the Home Loan industry. One claims
that banks will have to increase the fees paid on home lending to make up for the margin
shortfall that will result from the increased competition of a deregulated market. The other
perspective counters this argument by stating that competition will result in the abandonment
of fees, both upfront and ongoing, in an effort to increase or maintain market share.
It was recently reported that when the ANZ increased the monthly service fee on one of its home
loan products, the customer backlash was such that the bank quickly had to backtrack on the
decision, and wear the extra cost. Other reports almost go so far as to claim there is no alternative
but for the banks to increase fees. The Australian Financial Review (Gray & Rogers 17/6/96)
reported that the Chairman of the Australian Competition and Consumer Commission (ACCC),
Prof Allan Fels, would 'come under pressure...to allow higher fees and charges to preserve the
industry's profits'. A Westpac spokesman claimed in the same article that 'interest margins would
continue to be squeezed and banks would have to focus on revenue growth from
3 - 1
Chapter 4 Quantitative Measures of Competition
24
fee income'.
'In the UK, banks offer home loan rates at the official market rate, and make their profits from
follow-on fees.' The Weekend Australian (J. Kirby 3/8/96).
The RBA Bulletin also had this to say about fees 'Fees are also relevant. Some, such as
application fees or establishment charges, are once-only payments, levied when a loan is first
arranged Other fees, such as line service fees, are charged continuously over the life of the
loan and are, in effect, an additional interest margin'.
INTERNATIONAL COMPARISON
By reviewing the available international comparisons, of banking spreads and fees, it was found
that overly simplistic data has been used, and is therefore of limited application to Australia.
This data prepared by Salomon Brothers and the OECD either made comparisons between banks
that were so different in the markets in which they dealt as to be unusable, or else the data was so
surrounded by disclaimers as to be considered unworkable. The RBA, in a commitment to the
House of Reps Standing Committee, conducted its own research, and, after much frustration,
provided a statement in the RBA Bulletin of October 1994. The statement, in short, claimed that a
workable comparison could only be made between Australian retail banks and their counterparts in
the United States, the United Kingdom, Canada, and New Zealand.
3 - 1
Chapter 4 Quantitative Measures of Competition
25
The international comparison found:
I. Australian banks' margins were slightly higher than most, ranking second highest
behind
the US.
2. Australian banks ranked the lowest for fees and charges.
In conclusion as to whether customers are seeing quantitative benefits from deregulation, my
research has found the same outcome as that of the RBA researchers and they have expressed
these findings as 'some [customers] are better off, some are worse off and some are, like the
average, neither one or the other' the RBA further justifies this conclusion with 'on average,
borrowers are paying more for their loans than they did a decade or so ago but they are
paying not the banks but those people who lend money to or deposit money with the banks'.
3 - 1 5 - 2
Chapter 5 Re-regulating the Market
26
CHAPTER 5
RE-REGULATING THE MARKET
At no time has the home loan market really been without regulations of some sort. Private
banks must abide by prudential supervision measures. These measures in turn affect home
loans. In fact at no time has it been suggested that banks should operate without a degree of
government supervision.
Deregulation was the removal of regulations that limited certain bank operations. We have
seen that when one sector is regulated while another is not, for example the bank sector against
finance companies, then one sector will prosper at the expense of another. Deregulation was
supposed to be about the consumer prospering as a result of competition.
Now we discuss the issue of re-regulation over certain sectors and customer types. This set of
regulations can be said to be ethical regulations. The regulations to which I refer are the Code
of Banking Practice and the new Uniform Consumer Credit Code.
The Banking Code of Practice came into effect in 1995. It was a banking industry wide set of
guidelines that ensured customers were being treated fair and equitably. The code is not an
official regulation as such, more an industry standard. For home lending the code has had little
implications nor effect, other than to attempt to provide some conformity between the banks.
3 - 1 5 - 2
Chapter 5 Re-regulating the Market
27
Uniform Consumer Credit Code is a set of government legislation that act to ensure that all
consumer customers are treated in a fair and ethical manner. It aims to ensure that all consumers
of financial products are aware of all obligations before obtaining finance. The Credit Code has
meant significant alterations for the finance industry. Finance contracts have been rewritten in
plain English, the method of presenting finance information has had to change and the customer is
now required, by some institutions, to seek independent legal and financial advice before being
able to settle finance. This move has been taken to ensure that customers are fully aware of their
obligations, rights, and that the finance decision is the correct one for them.
On the home loan industry the effect is most dramatic where the banks have offered 'honeymoon'
loans to get new customers. Under the new Credit Code no penalties will apply to consumer
finance. This means that 'honeymoon' loans will not be possible for the banks and the competitive
advantage they maintained over mortgage lenders will be greatly reduced. Rogers (AFR 1996) put
it this way 'Banks may face another round of margin pressure on their home loan business ....
when new consumer credit laws invalidate the shackles banks place on borrowers who take up
cheap loan offers'. This could also see the percentage of mortgage defections going up in the short
run as customers use the high levels of competition and the credit code to shop around for their
home loan refinance.
3 - 1 5 - 2
Chapter 5 Re-regulating the Market
28
5 - 3
Despite these restrictions to early payout penalties under the credit code, National Australia Bank
went ahead and announced a 'honeymoon' loan of 6.99% for 12 months, on 31/10/96, the day
before the credit code became effective. Rogers (AFR 1996) reported that 'NAB ...surprised its
rivals by choosing to rely on a product line which many regard as uneconomic with the
introduction...of a national consumer credit law.' It would appear that even though the
'honeymoon' loan may not prove profitable it will continue to be used in an effort to attract
customers into the banks.
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
29
CHAPTER 6
CONCLUSION
FUTURE DEVELOPMENTS FOR THE INDUSTRY
So far the discussion has taken a course from the history of the Home Loan market, through the
period of regulation and then deregulation, and up to the present. An analysis was shown for
the present environment. This analysis attempted to measure the effects, positive or negative,
of deregulation. Now in conclusion I attempt to outline trends and predictions for the future of
the Australian Home Loan market.
TECHNOLOGY
The largest influence on this market over the past 15 years has been deregulation, however, the
second largest influence has been technology.
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
30
6 - 2
Although, the technological revolution has largely coincided with the period of deregulation in
Australian financial markets, the level of technological adoption in Australia is arguably due
more to deregulation than the availability of new technologies. It is suggested that new levels of
competition in the finance sector, resulting from deregulation, was the necessary motivation to
improve processes through technological developments, these improvements aim to reduce
operating costs and increase benefits to customers, giving the organisation a competitive
advantage. Without the increased competition, of a deregulated industry, there would have
been little advantage in adopting expensive technological changes.
In the future, with entrenched levels of competition between all financial institutions, the level
of technological adoption will continue to grow as each institution strives to find, marketing, or
operational cost, advantages over their competitors.
For the banks technological develop will include the continuing centralisation of services. For the
banks to regain some competitive advantage they must unite the benefits from both their own and
the originators business. That will mean that banks will have to reduce the costs of operations.
The major operating costs to banks is the extensive branch networks. Therefore banks will have to
rationalise this network by shedding less efficient and less needed branches. Already there have
been moves my banks to open Supermarket kiosk facilities. These kiosks operate on small staff
numbers offering only the basic product service range. They are small and inexpensive while still
being able to reach the major population centres. The US already has kiosk networks from which
Australian banks may be taking an overall framework.
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
31
Supporting this kiosk structure will be more mobile bankers operating from a vehicle or home.
They will seek the home loan applications and then sign the customers up. All other back office
work will be conducted from a central area, such as the home loan centre operated by ANZ in
Chapter 6 Conclusion - Future Developments for the Industry Melbourne. The customer's home
loan will then be maintained and administered between the bank and the customer through non-
branch contacts such as correspondence, telephone, or computers.
Tele operations, any service that can be provided over the telephone, have been identified as a
relatively inexpensive means of reducing costs and increasing customer service. Today more and
more banks offer "over-the-phone" service. This allows the banks to centralise a single facility
for either a state or national operations. Centralisation reduces duplication and therefore the
associated costs. Many banks have made use of telephone servicing of customers for some
years, and now we see all banks offering more of their product lines over the phone.
Computer based services will be utilised more and more as they become both more readily
accessible and offer greater customer confidentiality. At present some services are offered to
differing customer segments via either the internet or dedicated computer systems. On the future
of Internet services, computer and software giants, such as Oracle, predict that PCs will be
replaced by simple home terminals that draw all processing power from a centralised computer
source. This will allow applications to be uniform throughout all homes, and therefore offer
uniformity of banking operations via the service. In the computer industry this home terminal
alternative to PCs is expected to be the next revolution in affordable computing, and could well
be the computing generation banks have waited for, before implementing nationwide computer
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
32
6 - 4
services.
In a speech presented by Dr Pravendra Sharma, Director of the Investment Development Division
of the Department of Economic Development and Trade, the present cost to bank of providing a
single transaction has been measured as follows:
1. In branch $1.07
2. Teleservice 0.54
3. Automatic Teller Machine 0.27
4. Personal Computer 0.15
5. Internet 0.01
As can be seen from these figures it would be a significant saving to the bank costs if they can
replace branch transactions with other services.
Alternatives for the bank in the short term ,while implementing longer term technological
changes, include horizontal & vertical integration, mergers and takeovers.
INTEGRATION
In a bid to beat the competitors, the banks will attempt to fight through subsidiaries. This tactic
proved successful during regulation when banks were unable to enter the consumer lending
market directly, and instead operated through finance companies over which they had control.
Now banks may either buy out, or create their own low operating cost mortgage originators. To a
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
33
6 - 5
degree we have already seen this through the offering of 'basic' home loans either directly or
indirectly (NAB operates basic home loans through the wholly owned Bank of New Zealand).
Alternatively banks may diversify into real estate offering both realtor services and home loan
origination.
MERGERS
At present the Wallis Inquiry is 'charged with providing a stocktake of the results arising from
the financial deregulation of the Australian financial system' [Terms of reference]. A major
outcome that is eagerly being awaited from the inquiry, is the recommendation to allow major
Australian banks to merge without substantially decreasing competition. It is thought that Mr
Wallis, Chairman of the inquiry, is pro-merger and will recommend that they be allowed to go
ahead. The possibility of major banks and insurance companies being able to perform mergers
could speed the rationalisation of the industry and reductions in the cost of providing services.
With or without mergers the banking industry seems set to see a significant number of job
losses. Recently Westpac sought the early retirement or redeployment of 300 branch managers.
This is suspected to be only one of many waves of job loss that will affect the industry over the
next five years. ANZ is currently planning staff reductions of between six and seven thousand
over the next 12 months.
In a bank merger, such as Westpac and NAB, there would be the opportunity to effectively reduce
total operating costs through the closure of branches in all localities that presently site both a NAB
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
34
6 - 6
and a Westpac branch. Other services such as teleservices, and documentation services can also be
centralised for both operations. Management will not need to be duplicated, and the bank could use
the opportunity to thin out the ranks of both banks' staff during the reshuffle. Prof Fels, head of the
ACCC, is quoted as having said that "Branch reduction of the magnitude required to deliver a
highly efficient banking sector in this country will require a reduction in the number of banks"
(RBA June 1996) it is thought a reduction of branches of up to 40 percent would still allow branch
access equivalent to that in the United States.
FUTURE OF NON-BANK LENDERS
The last five years of relatively low interest rates and low inflation have served to give the
mortgage managers a niche entry into the home loan market, but will it last?
At the present moment the future still looks bright for mortgage managers. The banks' marketing
advantages have all but disappeared, with either the credit code reducing the benefits of
'honeymoon' loans, or mortgage managers being able to offer greater varieties in the home loan
packaging. Interest rates decreased again in early November, and the RBA is not expecting an
increase in inflation in the foreseeable future. The Mortgage managers do not have any
immediate concerns about technology changes, as their services are not technology dependent.
Are there gloomy days ahead for mortgage managers? I think if the banks have their way then
mortgage managers will only be a short lived phenomenon. Banks will do everything they can
to price mortgage managers out of the market if they lose too great a percentage of the market
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
35
6- ?
share, and they can do so through cross-subsidising the home loan product through other
products. They have the size, and could sustain a price war for longer than most mortgage
managers. They will also look for ways of closing the niche to future mortgage managers. The
best way for banks to do so is through long term cost reductions in their own operations. This
will keep the banks playing on the same playing field and give them room to operate margins on
a product by product basis. It is possible that the margin squeeze on mortgage managers is
already being felt. In August one mortgage manager was accused of only providing a 'half-
measure' when it failed to pass on an interest rate decrease from the Reserve Bank, an accusation
that is more familiar to banks than mortgage managers. Yet another securitiser has had to close
three of its sales offices in August, while it claimed to still be recruiting it was not explained why
the closure had to occur, given the expansion it had enjoyed recently.
FUTURE DEVELOPMENTS FOR CUSTOMERS
The consumer, it has been said, is the one that is supposed to get the benefits from
deregulation. How have they fared over the period of deregulation in the home loan market?
From a pricing perspective it can be said that the customer has only received marginal benefit from
deregulation. The average gross margin for banks has only trended downwards slightly over the
period and possibly the difference could be made up in fees. Non-bank financial intermediaries
appear to be offering the consumer some greater price benefit when we consider that they are
operating on margins around 2%, again some of this benefit may be consumed through fees.
3 - 1 5 - 2
6 - 1
Chapter 6 Conclusion - Future Developments for the Industry
36
6 - 8
But what about the other benefits consumers have gained from the increase in competition. The
product choice now seen in home lending is tenfold in comparison to that offered during
regulation. Not all consumers will have the same needs and therefore some will require the
different options they are now offered. This benefit should not be forgotten in the pre and post-
deregulation comparison. Technology adaptations encouraged by the increased competition have
also added to the convenience offered to many borrowers and can be considered a benefit.
Mr B. Fraser, the past Governor of the Reserve Bank, is a supporter of the deregulation process,
and had the following to say about it 'Everyone would like to see lower costs and margins, but not
everyone is as keen to see the service fees, branch closures, staff reductions and other changes
necessary to bring them about. Those changes must, however, be part of the process. There is no
doubt in my view that deregulation has been - and will continue to be - of substantial net benefit to
the community. This benefit comes mainly through the increased choice available to both lenders
and depositors (if anything, there is too much choice), and through the greater access which
consumers now have to financial services from banks on more competitive terms than existed
under regulation' (RBA March 1991).
APPENDIX 1
TIMELINE OF THE BANKING & FINANCE SECTOR IN AUSTRALIA
SINCE 1911
1911
COMMONWEALTH BANK
is created
1929
THE GREAT
DEPRESSION
1934
Tasmanian Parliament Select Committee
was formed.
1941 National Security Regulations
(Curtin) - licensed banks are
required to place funds in a special
account with the Commonwealth
Bank, to supply it with information,
& comply with its policy on
advances.
1945
THE BANKING ACT
is introduced
1959
Reserve Bank Act
is passed
1963
Review of economy
by Dr James Vernon
1973
Interest rate ceilings on certificates of
deposit are now removed
1976 Government
introduces Monetary
Targets 'Condit ional
projections'
1924
Legislation was passed to make the
Commonwealth Bank into the Central
Bank.
1930
Central Reserve Bank Bill was passed
1937
Royal Commission into the Monetary &
Banking System - "the most desirable
banking system is one which includes
privately owned trading banks... [and] in
which a strong central bank regulates the
volume of credit and pays some attention
to its distribution".
1942
Commonwealth Bank given power to
set maximum interest rate. (Regulation)
1956
From 1956 to 1962
Private Banks establish
Savings Bank subsidiaries
1960
Commonwealth Bank splits to become
Commonwealth Banking Corporation and
the Reserve Bank of Australia
1970
ANZ takes over ES&A, all large banks
and most other banks in Australia are now
Australian owned
1974
Financial Corporations Act
is introduced
APPENDIX 1
1980 Removal of interest rate ceilings
on deposits with trading and savings banks Australian Bank Ltd granted
banking authority. Treasurer authorises merger between Bank of NSW and
Commercial bank of Australia and between National Bank of Australasia
and Commercial Banking Company of Sydney Minimum maturity on trading
bank CDs reduced from 3 months to 30 days
1983 Martin Review Group is initiated by newly elected Labour Government. It
endorses the Campbell Committee findings. Australian dollar is floated.
Deregulation of Australian Stock Exchange. Authorities to trade in
foreign exchange granted to 40 non-
banks. Removal of min and max maturities on trading and savings bank
interest-bearing deposits. Savings banks permitted to offer cheque facilities on all
accounts. '30/20/ rule abolished.
1986 Ceilings are removed on new
housing loans. The distinctions
between Savings & Trading Banks is removed. Statutory Reserve Deposits
(SRDs) are replaced with non-callable deposit arrangements. The Prime
Asset Ratio is introduced over the
Banks by the RBA.
1988
Electronic Data Interchange (for corporate customers) is introduced.
1992 House of Reps Standing Committee on Finance and Public
Administration release report 'Checking the Changes: Review of Certain
Recommendations of the Banking Inquiry Report
1979 The Campbell Committee is established
Introduction of tender system for Treasury Note sales
1981 Campbell Committee's Final Report is delivered in September. End of quantitative bank lending guidance Introduction of tender system for Treasury Bond sales. Relaxation of portfolio controls on savings banks
1984
Invitations to Foreign Banks are called for. 15 licenses are issued to foreign banks. Automatic sweep accounts are introduced. Australian Payments System council is established. Macquarie Bank Ltd & Advance Bank Australia are granted
banking authority.
1985 All loan interest rate ceilings are removed except for owner-occupied housing loans of amounts less than $100,000. Monetary targets are abandoned.
EFTPOS becomes widely available. RBA publishes framework for monitoring
the adequacy of a Banks' capital.
1987 Bank Interchange Transfer System
is introduced
1989 & 1991
Draft Bill of the Uniform Credit Legislation is released.
1991
House of Representatives Standing Committee on Finance and Public Administration release report 'A Pocket
Full of Change: Banking & Deregulation'
APPENDIX 1
1993
'Clarification of Risk Weighting for
Mortgage Secured loans' is released by
RBA 1996
Wallis Inquiry (The Daughter of Campbell
Inquiry) is established
Code of Banking Practice is introduced
Uniform Consumer Credit Code becomes
effective in November
1950
Finance companies issue first
debentures
1954
National Bank buys 40% of
Custom Credit Corporation
1959
All private Banks have an interest in a
finance company
1963
Chartered Bank (based in
London) submits to take over
ES&A Bank, the submission is
declined
1972
All Trading Banks have a controlling
interest in a Finance Company
1981
Consumer Credit Legislation
is introduced into NSW & Vic
APPENDIX 2
TIMELINE OF NON-BANK FINANCIAL INTERMEDIARIES IN AUSTRALIA
SINCE 1920
1920
Australian Guarantee Corporation (AGC) commenced
1941
Capital Issues Regulation
allowed the government to fix an interest
ceiling for pastoral companies and building
societies.
1952
Capital Issues Regulation
expires
1955
English, Scottish & Australian Bank
form Esanda
1962
Consumer Credit Law
Uniform Draft Bill is abandoned.
1970
ANZ takes over ES&A Bank
along with Esanda
1980
The first Cash Management Trust
is established.
A Credit Union introduces the Automatic
Teller Machine (ATM) into Australia.
1984
A revised Consumer Credit Legislation
is introduced into NSW & Vic
APPENDIX 3.
TABLE 1 : ASSETS OF FINANCIAL INTERMEDIARIES
(June, percent of total)
1
929
1936 1953 1970 1980 1985 1991
Banks 9
4
95 88 70 58 59 72
Building
Societies 2 2 3 5 12 10 4
Credit
Unions
1 1 2 2
Money
Market
Corporations
3 6 11 10
Pastoral
Financiers 4 3 4 3 1 2
Finance
Companies
1 3 15 18 13 7
Other 2 3 4 3 5
Sources: Data from Butlin (1987); Royal Commission on Banking (1937); Butlin, Hall
&White (1971); Foster & Stewart (1991); Reserve Bank Bulletin Sept 1991
TABLE 2 : ASSETS OF FINANCIAL INTERMEDIARIES (June, percent of total)
1992 1993 1994 1995 1996
Banks 74 77 78 77 77
Building Societies 5 2 2 2 2
Credit Unions 2 2 3 2 3
Money Market Corporations 10 10 9 10 10
Pastoral Financiers 1
Finance Companies 6 6 5 6 6
Other 3 3 3 2 2
Source: Reserve Bank Bulletin October 1996.
APPENDIX 4
Table 1: Banking sectors percentage share of the Owner-Occupied Home Loan market
for the years 1977/1978 through to 1995/1996.
Source: Reserve Bank Bulletins
Source: Reserve Bank Bulletins
APPENDIX 5
Table 1: The Spread between average bank Variable Rate Home Loan interest and the 90
day Bank Bill.
S o u r c e : R e s e r v e B a n k B u l l e t i n s
A P P E N D I X 5
Table 2: The spread measured between bank Varaible Rate Home Loan (VRHL) and the
6 m o n t h f i x e d d e p o s i t r a t e f o r t h e 9 2 - 9 6 J u n a v e r a g e .
APPENDIX 5
Table 3: The spread measured between Mortgage Manager (Securitiser) Variable Rate
Home Loan (VRHL) and the 90 day bill rate for the 92 - 96 Jun average.
BIBLIOGRAPHY
Reserve Bank of Australia, Reserve Bank of Australia Bulletin June 1996: The Evolution of the Housing Loan Market in Australia, AGPS, Canberra.
Reserve Bank of Australia, Reserve Bank of Australia Bulletin March 1991: Some Comments on the Economy, Deregulation and Housing (Governor B.W. Fraser), AGPS, Canberra.
Reserve Bank of Australia, Reserve Bank of Australia Bulletin May 1992: Bank Interest Rate Margins, AGPS, Canberra.
Reserve Bank of Australia, Reserve Bank of Australia Bulletin September 1995: Trends in the Housing Sector, AGPS, Canberra.
Reserve Bank of Australia, Reserve Bank of Australia Bulletin October 1994: Some Recent Banking Developments (Deputy Governor I.J. MacFarlane), AGPS, Canberra.
Reserve Bank of Australia, Reserve Bank of Australia Bulletin June 1994: Some Current Issues in Banking (Governor B.W. Fraser), AGPS, Canberra.
Reserve Bank of Australia, Reserve Bank of Australia Bulletin October 1996: Current Banking Issues (Deputy Governor G.J. Thompson), AGPS, Canberra.
Ullmer, M. 1996, 'The Wallis Inquiry - A challenging nine months', The Australian Banker,
Vol. 110, No. 4 August 1996, pp. 122 - 126 & p. 143.
House of Representatives Standing Committee on Finance and Public Administration
November 1991, A Pocket full of Change: Banking and Deregulation, AGPS, Canberra.
House of Representatives Standing Committee on Finance and Public Administration October
1992, Checking the Changes: Review of Certain Recommendations of the Banking Inquiry Report, AGPS, Canberra.
Perkins, J.O.N. 1989, The Deregulation of the Australian Financial System: the experience of the 1980s, Melbourne University Press, Melbourne.
Kirby, J. 1996, 'Prepare for fees squeeze by banks' Weekend Australian, 3 - 4 Aug.
Gray, J., Rogers, I. 1996, 'Banks look to higher fees' Australian Financial Review 17 Jun.
Clark, D 1996,Banking in age of Technology Power' Australian Financial Review, 19 Jun., p. 40.
Huyland, A 1996,'Aussie on track to be top home lender' The Courier-Mail, 7 May.
'Solicitors become lenders' Townsville Bulletin, 30 Mar.
Brown, B 1996,'Home buyers bank on realtors, Weekend Australian, 17 - 18 Aug.
'Home buyers desert banks in droves, Townsville Bulletin, 17 Apr., p. 15.
Gray, J 1996,'ANZ products target home loan market, Australian Financial Review, 4 Jul.
Kavanagh, J 1996, 'Non-bank lenders moving upmarket', Weekend Australian, 26 - 27 Oct.
Rogers, I 1996,'New consumer law's open door on lower loans, Australian Financial Review,
23 Oct.
Rogers, I 1996,'NAB unveils 6.99% 'honeymoon' loan rate despite risks, Australian Financial
Review, 1 Nov.
Rogers, I 1996,'Credit unions cancel cheap loans, Australian Financial Review, 22 Apr., p. 34.
'Rams shuts three of its sales offices; Australian Financial Review, 5 Aug.
Rogers, I 1996,'Aussie's interest cut a half-measure', The Australian Financial Review, 2 Aug.,
p. 33.
Kirby, J 1996,'ANZ opens home-loan war bunker, Weekend Australian, 17 - 18 Aug.
Gray, J 1996,'Schroders urges more mergers, The Australian Financial Review, 28 Mar.
Gray, J 1996, Managers' jobs on line in Westpac shake-up, The Australian Financial Review,
23 Oct.
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