APRA warns of the risks of too much competition

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In a submission to a Productivity Commission inquiry, the Australian Prudential Regulation Authority (APRA), which regulates the banking, superannuation, and insurance sectors, has argued that too much competition could upset the stability of the financial system.

The commission was tasked by the Turnbull government to investigate competition in the financial system as part of its response to a 2014 financial system inquiry by former banker David Murray.

APRA said the global financial crisis drove away less “financially strong” companies from the industry, resulting in greater market concentration; and that the “relatively high levels of concentration” within the industries it regulates do not adequately reflect the level of competition within a sector, The Australian reported.

Australia's four big banks, Commonwealth, Westpac, National Australia Bank, and ANZ, hold majority of the market share, at 75% – a figure that has remained pretty much the same for the past five years.

The major banks and AMP represent almost half of all financial advisers in the country. In the insurance sector, QBE, Suncorp and IAG hold major control, while five life insurance groups have more than 80% share of the market.
Australia's largest banks also have cost-to-income ratios of about 45%, which is among the lowest in the world. The ratio indicates the efficiency of bank operations – the lower the ratio, the more profitable the bank. For comparison, large banks in the US have ratios above 60%, 65% in Japan, and almost 80% in Britain, the report said.

“APRA is of the view that, with the right balance, stability and competition are mutually reinforcing objectives,” APRA wrote. “However, competition can also lead to instability in the financial system and there are times where it is important for APRA to actively temper competitive forces. Periods of excessive and unsustainable competition can result in financial institutions inappropriately pricing risk or unintentionally accepting excessive risk in order to gain or retain market share.”

APRA said the banking sector saw its return on equity drop to 11.7% over the latest financial year – below the long-run average of 13.4%. The returns were expected to suffer further decline in the wake of stronger capital requirements, it said. Meanwhile, the sector's other measure of profitability, net interest margins, “converged” over the past decade, although the larger banks managed to retain an edge over the regional lenders.

Martin North, principal of Digital Finance Analytics, said APRA should have compared returns and margins on an international basis.

“Australian banks are super profitable relative to players in many other countries, thanks to weaker competition and the market moving rates together,” he told the publication. “We may have better cost income ratios here, but that has more to do with … profits than core efficiency.”


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