Big four have been 'cream skimming' for too long, say rivals

Under a proposal issued by the regulator in 2018, banks would no longer have a flat rate of 25 per cent or 35 per cent but be able to apply a sliding scale of risk weights to mortgages.

Smaller banks would be allowed to apply risk weights of just 20 per cent for the lowest-risk mortgages to owner-occupiers with loan-to-valuation ratios of 50 per cent or more, allowing them to charge a lower and more competitive interest rate.

Higher-risk mortgages, such as those to investors with interest-only loans, would on the other hand attract a much higher risk weighting.

The changes would mean banks with a relatively less risky loan book would not need to hold as much capital against mortgages, which would enhance profitability.

Customer Owned Banking Association CEO Michael Lawrence said an independent study commissioned by his organisation found the existing framework delivered the big four a funding advantage of more than $1000 a year on a residential mortgage of $400,000.

“The report said that APRA should be looking to close the gap in risk weights in a way that prevents the major banks ‘cream skimming’ the lowest-risk home loans,” Mr Lawrence said.

Cream skimming refers to a an approach where the dominant players are able to service low-cost and high-value clients by charging less and leaving customers with more complex needs to be serviced by other less-profitable players.

Mr Lawrence said a more evenly balanced approach to risk weights would ensure a more competitive banking sector, which would feed into better outcomes for customers.

“Media reports that APRA is considering amending the uncompetitive risk weight framework is welcome news for the customer owned banking sector,” Mr Lawrence said.

A spokesman for Bendigo and Adelaide Bank said it would be inappropriate to comment on the looming changes until more detail was announced and it better understood the impact it would have on the business, its customers and other stakeholders.

The changes are expected to remove a key impediment to competition among smaller and larger banks, however they are not expected to close the gap overnight.

Larger banks have access to cheaper and more diverse sources of funding on account of their size, economies of scale and the implied notion that larger banks are too big to fail.

The changes are expected to be the first in a series of three announcements to be made by the prudential regulator by the end of the financial year.

The remaining two announcements will provide guidance around loss-absorbing capital buffers needed by large banks known as DSIBs (domestic systemically important banks) and executive pay.