I didn’t have time to address this yesterday, but I certainly wanted to.
I’m sick of people complaining about banks making profits and increasing interest rates, without giving any thought to changing bank and instead wanting the banks to be more heavily regulated.
Regulation is not the answer to this problem; competition is. At the moment there is virtually no competition for two reasons:
1) People don’t consider changing bank. If they did, the banks would be more afraid of losing customers and be less willing to annoy their customers.
2) The federal government put that silly deposit guarantee in place which gives banks an unfair advantage over the smaller outfits such as credit unions. This bit of government regulation is killing competition by making smaller outfits seem less safe in the eyes of customers.
The banks are doing what any sensible profit-making business does when in a virtual monopoly position; they’re making as much money as they can. Of course they wouldn’t be in a virtual monopoly position if the federal government’s deposit guarantee hadn’t caused a heap of people to shift their business from credit unions to the big banks.
The federal government’s regulations are largely responsible for this situation, and yet people want more regulation. Haven’t people learnt from the financial crisis yet? Government regulation was the main catalyst for the financial crisis, as the US government forced lenders to lend money to people who could never pay it back. Government regulation does not help people when it comes to banking. In fact the current situation is not sustainable as this ever increasing concentration of the banking business will lead to many people defaulting on their loans, followed by banks struggling to sell houses, followed by the federal government (aka the taxpayers) compensating banks for lost investments due to a lack of loan repayment income.
The solution to this problem is for the deposit guarantee to be removed. This will encourage competition.
Competition is good for consumers, and leads to businesses being more creative in the way they run their business in an effort to gain more market share. This, in turn, leads to economic growth.
The solution is simple…the question is though, will the government make it happen?
Samuel
Comments Disabled To "If you don’t like your bank, then change!"
#1 Comment By davky On November 6, 2010 @ 4:47 am
I agree with your assessment of the problems with the deposit guarantee. However I do feel it was necessary – perhaps they needed to extend it beyond banks and to smaller, yet still stable organisations. However, the guarantee was discontinued in March, I believe.
In relation to changing banks – this is (usually) a very simple process if you just have a savings account. At most, you will only need to tell your employer and possibly any organisations that you have direct debits set up with e.g. Telstra, ACTEW etc.
However, I think its around 40% of Australians have mortgages, and more with term deposits, investment accounts etc. Changing banks can be a very costly exercise – which for a typical family with a mortgage can be out of the question. Especially when you change to another financial institution that will, sooner or later, screw you over like your original bank did.
#2 Comment By Samuel On November 7, 2010 @ 11:36 pm
Hi Davky,
The deposit guarantee wasn’t discontinued, it just stopped accepting new liabilities at the end of March. It probably would be difficult to completely scrap it for contractual reasons…and that just adds to my annoyance about the whole scheme.
On the subject of changing banks though, which is probably the more important subject, you’re right, it is hard for a lot of people to move to another financial institution due to exit fees or the time involved etc. I refrained from addressing that point at the time of my blog post because I was still mulling over a theory about how it could be made easier to change financial institution…specifically some sort of “transferable bank account number” which you could just take with you from one bank to the next, in a similar way to how you can port a phone number from one phone company to another.
As much as I like the initial sound of the idea, I just can’t find a way to make it work without adding an extra layer of bureaucracy to an already fairly difficult to comprehend banking sector.
The one idea I do favour is the credit unions who are willing to pay you to bring your business across to them, which reduces the initial cost barrier for the consumer whilst hopefully not eroding the long-term benefits of switching to the credit union. The credit union will eventually get their money back in fees or interest, so I can see this type of scheme taking off if it works for the few credit unions who are already doing it.
At a legislative level, I’d like to see the Four Pillars policy abolished. Removing their immunity from takeover would, I think, force them to be more competitive rather than running in virtual cahoots. In the short term you probably would see one of them launch a hostile takeover on one of the other big banks…but given Australia’s love of tall poppy syndrome, I think you would find that as soon two of the big banks combine, the resulting mega-bank would lose customers to a whole raft of smaller institutions which would suddenly look more appealing to a lot of consumers. Also, in such a situation, I don’t think any of the banks would dare to price themselves out of the market due to the increased competitiveness of the market.