APRA curbs thwarting price competition

Investment and interest-only lending caps introduced by the Australian Prudential Regulation Authority (APRA) in 2014 and 2017, respectively, could be offsetting costs incurred by lenders from the Major Bank Levy.

According to a Residential Mortgage Price Inquiry interim report from the Australian Competition and Consumer Commission (ACCC), the major banks uniformly increased interest rates on investment and interest-only loans to limit demand from borrowers.

The report noted that, as a result, price competition between the major banks was stifled, as competing banks chose to favour compliance ahead of competition.

“APRA’s prudential benchmarks have impacted the scope for ADIs to compete on price for residential mortgages for investor and interest-only borrowers, as any offer of interest rates below those available from other lenders may attract too many new borrowers and put the ADI at risk of non-compliance,” the ACCC noted.

Commenting after the report’s release, RateCity money editor Sally Tindall accused the big four banks of moving “like a flock of sheep” when making price determinations.

“When it comes to pricing, the big banks have moved like a flock of sheep for years. If one of them shifts rates, the remaining three will typically follow suit,” Ms Tindall said.

“The market doesn’t lack competition — it lacks competitive behaviour from the establishment. It also lacks a willingness from home owners to switch away from the big four.”

Additionally, the ACCC sought to assess whether the Major Bank Levy, which requires lenders earning over $100 billion in total liabilities to pay a 0.06 per cent tax per annum, prompted banks to pass on costs to borrowers through rate rises.

The banks under review, the big four and Macquarie Bank claimed that levy costs were not offset through changes to pricing but were instead absorbed internally.

However, the ACCC found that the five banks altered pricing arrangements on residential mortgages to meet profit and performance targets.

“We observe that, on several occasions since July 2015, individual Inquiry Banks [banks under review] reconsidered their residential mortgage interest rates in light of their expected performance against these targets.

“For example, concern about a shortfall relative to target was important in decisions by two Inquiry Banks to increase headline variable interest rates in March 2017.”

[Related: ACCC releases mortgage pricing report]