Financial services competition remains key concern: Henry

Competition in Australia’s banking sector remains a key concern for policy makers, according to Treasury secretary Ken Henry.

Speaking at the Count Financial annual conference in Canberra today, Henry said the threat to competition resulting from consolidation in the banking sector has far reaching consequences for Australia’s economy. As such, Treasury is watching the competition dynamic very carefully, Henry said.

Henry said one of the aftershocks of the global financial crisis has been a concern that competition has been weakened in many areas. He said while Australia’s banking system has proven to be resilient during the crisis, the competitive dynamic has changed due to market exits and consolidation.

Henry said an example of this change in dynamic was that the four major banks (as well as St George) have increased their market share of owner-occupied loan approvals from 60 per cent in mid-2007 to 82 per cent today. In addition, the major banks’ net interest margins have increased by 20-22 basis points throughout the crisis, Henry said.

Small players and foreign banks have historically created a strong competition dynamic in Australia and it is important for policy-makers that Australia returns to that type of competition dynamic as soon as possible, Henry said.

“It is of course important that we have competition among the providers of financial services. It’s also important that we have a sound prudential regulation framework.”

Australia’s financial institutions play an essential role in funding the gap between domestic investment in Australia and national savings, Henry said. He described that gap as significant, saying Australia relies heavily on foreign investment, with much of the capital foreigners provide being intermediated by the Australian financial system.

“Our domestic institutions need the confidence of foreign investors that those institutions will service what they borrow. For a safe and efficient financial system, is very much about the wellbeing of the Australian community as a whole — it’s part of our infrastructure.”