ACCC Residential Mortgage Price Inquiry Report

The ACCC has released its final report for the Residential Mortgage Price Inquiry into prices charged by the five banks affected by the Major Bank Levy in relation to the provision of residential mortgage products in the banking industry from 9 May 2017 to 30 June 2018.

The Major Bank Levy applies to authorised deposit-taking institutions (ADIs) whose total liabilities, essentially their sources of funding for loans (including residential mortgages), exceed the levy threshold of $100 billion in any quarter. The Major Bank Levy is applied to applicable liabilities at a rate of 0.015 percent each quarter, or 0.06 percent annually. ANZ, CBA, Macquarie Bank, NAB, and Westpac have been subject to the Major Bank Levy since it commenced on 1 July 2017.

The final report details residential mortgage prices and the basis of price decisions over the price monitoring period.

The ACCC found no evidence that the five banks changed prices specifically to recover the cost of the Major Bank Levy, whether in part or in full, during the price monitoring period.

The ACCC did find that measures announced by APRA in March 2017 to limit new interest-only residential mortgage lending created an opportunity for banks to synchronise increases to headline variable interest rates for interest-only mortgages.

While APRA’s interest-only benchmark had the objective of contributing to financial system stability, the ACCC found it lessened price competition for interest-only lending.

The ACCC found that:
Opaque discretionary pricing causes inefficiency and stifles price competition
The ACCC concluded that the headline interest rates advertised by Inquiry Banks and used to attract residential mortgage borrowers are a poor indicator of the interest rate borrowers actually pay. The vast majority of borrowers pay substantially less than the relevant headline interest rates, a practice the banks call ‘discounting’.

More generally, the Inquiry Banks, particularly the big four banks, lack a strong incentive to reduce the cost that prospective borrowers incur to discover price information because they profit from the suppression of borrowers’ incentives to shop around.

New borrowers pay lower interest rates than existing borrowers on average
Existing borrowers who do not actively shop around for a better deal on a regular basis are the main losers from opaque discretionary pricing.

Some regulatory requirements exacerbated challenges faced by Other Banks
The ACCC also compared the approach to pricing of a sample of seven banks that were not subject to the Inquiry, for the period from 1 July 2015 to 21 November 2017. Three of these banks were particularly focussed on competing on price and therefore have lower rates. Some of the banks in its sample rely heavily on brokers and aggregators to gain market share. The ACCC notes that these banks, and other lenders in a similar position, are likely to be more vulnerable to future regulatory changes that affect the use of brokers as a distribution channel.

In exploring some of the challenges faced by the Other Banks, the ACCC observed that APRA’s benchmarks and capital requirements appear to have exacerbated the challenges the Other Banks experienced as a result of their smaller scale, including their smaller residential mortgage portfolios.

The ACCC considers that the lack of sensitivity to scale in the design of these regulatory measures has given a competitive advantage to the large banks. For example, compliance with APRA’s investor benchmark is likely to have been particularly challenging for the Other Banks as a direct result of the ‘one-size-fits-all’ cap on growth.

In addition, ADIs currently accredited by APRA to use internal modelling as inputs to the risk‑weights for their credit risk exposures typically have lower average risk-weights for residential mortgages compared to other ADIs. As a consequence, they are required to hold relatively less regulatory capital against their residential mortgage portfolio compared to other ADIs. This, amongst other things, results in a lower cost of funding residential mortgages for ADIs with Internal-Ratings Based (IRB) accreditation.

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