ACCC reports on mortgage pricing competition

The ACCC’s Residential Mortgage Price Inquiry has released its interim report in relation to the prices charged by the five banks affected by the Government’s Major Bank Levy: Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), Macquarie Bank Limited, National Australia Bank Limited (NAB), and Westpac Banking Corporation in relation to the provision of residential mortgage products in the banking industry from 9 May 2017 to 30 June 2018.

The Inquiry’s preliminary findings include:

  • Opaque discretionary discounts make it difficult for borrowers to compare products;
  • Basic (or ‘no frills’) residential mortgages are not always the cheapest after discounts;
  • New borrowers pay significantly lower interest rates on average than existing borrowers;
  • Signs of a lack of vigorous price competition between the Inquiry Banks, and the big four banks in particular;
  • The public’s reaction has been a constraint on pricing.

The report observes that the pricing behaviour of each of the Inquiry Banks appears more consistent with ‘accommodating’ a shared interest in avoiding the disruption of mutually beneficial pricing outcomes, rather than consistently vying for market share by offering the lowest interest rates. The Inquiry Report says that banks generally have not sought to compete by consistently offering the lowest headline variable interest rates to borrowers.

It also observes that the Inquiry Banks have tended to explain interest rate increases since July 2015 as being the result of increased funding costs and/or prudential regulation. At the same time, relevant decision documents indicate that some Inquiry Banks also considered that the higher headline variable rates would allow them to increase the revenue (and, in turn, profit) generated from existing borrowers (or their back-book).

The ACCC also considers that there has also, on occasion, been selective reporting of how prudential regulation has affected interest rates. For example, it appears that part of the reason one Inquiry Bank increased rates in July 2015 was to bolster their return on equity following an APRA announcement that they would need to hold more regulatory capital. The rate increases were, however, ascribed to a direction from APRA to limit lending to investors.

As at November 2017, the Inquiry Banks have stated that no specific decisions have been made to adjust residential mortgage prices in response to the Major Bank Levy.

Final report
The ACCC will issue a final report after 30 June 2018. The final report will consider the residential mortgage pricing decisions of the Inquiry Banks through to 30 June 2018, and explain how the Inquiry Banks have dealt with the Major Bank Levy in pricing their residential mortgages and more generally.

In addition, the ACCC will examine fees for residential mortgages and also consider non-price dimensions of competition. The ability of smaller lenders to compete with the Inquiry Banks will also be considered, as well as how consumer behaviour may influence residential mortgage pricing.

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