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ECONOMICS REFERENCES COMMITTEE
15/12/2010
Competition within the Australian banking sector

CHAIR —Welcome. Would you like to make an opening statement?

Mr Hirst —Yes, I would, thank you. Thank you for allowing me the time to appear today. You have a copy of our submission, and I am happy to answer any questions on that afterwards and certainly questions on anything else that you might have. However, I would like to make some opening remarks. There is no doubt that the impact of the global financial crisis and the actions taken to mitigate it have had an impact upon competition in the financial services sector in Australia. The major driver of that impact has been the availability and price of funding for the economy and that has in turn directly impacted the supply in terms of credit for end borrowers. At the height of the crisis, all financial institutions faced difficulties in funding their balance sheets and it was right that the government responded by guaranteeing the wholesale debt and deposits of authorised deposit-taking institutions. However, I personally believe that the execution of that initiative could have been handled differently. Given what eventuated, a better outcome would have been achieved by pricing the guarantee exactly the same for all ADIs whilst limiting the amount each ADI could raise under the guarantee. This would have preserved the existing market dynamic and avoided the outcome of the major banks using the artificial pricing advantage that emerged to make significant grabs for market share. However, what is done is done and I will leave that matter there and move on to the matters at hand.

As I observe the current debate on competition, I am becoming increasingly concerned that the discussion is being narrowed to the point that it is really a debate about price—the price of loans, ATM fees, exit fees and such. In any industry, a strategy that focuses on price alone is simply a race to the bottom. A great example of this is the emergence of non-bank mortgage providers in the 1990s. Those organisations entered the market because they identified that banks were subsidising their other activities by charging relatively higher rates on home loans. By competing on price in the home mortgage market alone, they were able to quickly gain material market share. The banks responded by competing with them on price. As a result—and the NAB highlighted this on Monday—banks were forced to cut costs as revenue shrank. This resulted in bank job losses, branch closures and banking utility being withdrawn from individual communities—many of them based in rural Australia.

Once a bank left town, people were forced to go to other places to do their banking and, pretty soon, they were doing their shopping in other towns as well. Before too long, most businesses in the towns that lost their banks closed. Some of the communities that found themselves in this position worked hard to return banking services by raising capital and joining with us to establish a community bank branch of Bendigo. Some do not have banking services anymore and some do not have a meaningful business presence at all.

But it is not only the communities and bank staff described previously that suffered at the hands of the price-driven strategy. Fast forward to the GFC, and those organisations that competed solely on price were the ones that were ultimately fatally damaged. As a result, there are next to no non-bank originators of real size remaining in the market. Their business model, which focused on best price, could not survive the external shock to the economy and their customers were left without funding for their loans. So while price is one important part of the competition debate, it is just that: one part.

As can be illustrated by the examples I have given, focusing on price alone can actually have the effect of lessening competition and, in the case of major bank branch closures in the 1990s, eliminating services altogether. Therefore, it is vital that we broaden the discussion. Competition should be defined by its many facets. Bendigo and Adelaide Bank competes on a value-for-money offering. We compete by partnering with communities to provide banking services where no-one else is prepared to. We compete by providing customer service at a level that is recognised as superior to any other bank in Australia. We compete by investing in infrastructure. For instance, the newest payment switch in Australia was built by a company in which we own a 47 per cent share. We compete by innovating to provide new solutions—community banking being one of the best examples of this.

Our ability to compete on factors other than price enables us to provide valuable and sustainable banking services in 90 communities across Australia where no other bank is present. Community sector banking, Rural Bank and our equity release product for the aged, Homesafe, further underline this point. None of this would be possible if we move to a position where the nation believed that competition equals best price. We must elevate the debate to where competition reflects choice and value. Importantly, we must agree a commitment between consumers, business, banks, regulators and government to develop a banking system and the infrastructure that will ensure our economy is as efficient and as fair as can be.

In closing my remarks, I note that for competition to be provided at this broader level, it is imperative that there be no impediments to, firstly, accessing sufficient funding to accommodate the number of customers who wish to exercise choice in their banking relationships, and, secondly, establishing a level regulatory playing field in respect of capital application. Our more detailed thoughts on these two points are outlined in our submission. As I stated earlier, I am happy to take any questions you have on the submission or on any other matters you would like to raise. Thank you.

CHAIR —You indicated in your opening statement that the GFC and actions—by which I presume you mean action taken by the government in response—contributed to a lessening of competition in the banking industry in Australia. In terms of the actions taken by government, you mentioned the guarantee—and I will ask about that in a minute—but were there any other actions that you think contributed to the lowering of competition?

Mr Hirst —No, I do not believe so, and I think it is important to put that in context. When the GFC emerged, it was a real shock to the economy and, as things deteriorated significantly overseas, the Australian economy ran the risk of being dragged into the malaise, even though the economy was performing well. So I think the government moved very quickly and appropriately, as I said in my submission, to put the guarantee in place. Their major concern at that time was the stability of the financial system. I think that was right. Perhaps if we had the opportunity again, I think we would need to have an eye on competition as well.

CHAIR —Okay. I do not think there is any argument about the need for the wholesale funding guarantee. I might be wrong on this, but I am fairly sure that it was first suggested by Malcolm Turnbull and so it has bipartisan support. I guess the issue—and we have had an inquiry into this in the past—is how it was delivered. You yourself just stated that its primary purpose was to help foster stability. In discussions I have had with other people and, I think, even with Treasury during the inquiry that we held on this, it was indicated that a rational investor looking to provide such a guarantee would price for risk, and therefore the differential price on that guarantee that was available to differently rated banks was an appropriate thing to have. However, if the primary purpose of the government intervening in the market in that way was to provide stability, should they have been looking at it as if they were a rational investor, given the outputs that they were trying to deliver?

Mr Hirst —I would probably question whether or not a rating is an appropriate way to look at the riskiness of individual institutions. I can very easily mount a case that a $50 million credit union is not as risky as the Commonwealth Bank: they do not invest in CDOs, they do not have international operations, they do not have business banking. But they will never be able to get a AA rating because they are simply not big enough—and, from our point of view, our size holds us back in terms of our rating as well.

CHAIR —What is your rating?

Mr Hirst —It is BBB+ from S&P and A2 from Moody’s, so we have got a bit of a split rating. I think, when we look at our financial institutions in terms of the risk associated with each of them, we need to understand that they are extremely well regulated by APRA, and one of APRA’s mandates is to ensure the stability of those individual institutions. Given that that is the base platform for being regulated in this economy, I think that there is a very strong argument to run that we were all equally risky and therefore should have received similar pricing.

CHAIR —That answers the second half of the question, in a way. So, regardless of what the market might have done, if you had been an external rational investor looking to provide a similar mechanism, you are saying that because of the outcomes the government was seeking to deliver and because the risk from APRA’s perspective was pretty well mutual, relatively, they should have priced accordingly and given you the same price, whether you were a AA bank or a BBB+ bank.

Mr Hirst —Yes, that is my view, although my understanding is that it was not the government that set that price; it was the Council of Financial Regulators.

CHAIR —Okay. So you had to pay a higher rate at that point to access wholesale funds with the government’s guarantee, which went straight to the government. When you then went to the market to try and obtain funds using the guarantee, like others did you find that you had to pay a higher price anyway?

Mr Hirst —Actually, we and our subsidiary Rural Bank were the only two banks in Australia that did not use the government guarantee.

CHAIR —You did not use it at all?

Mr Hirst —No.

CHAIR —Was that because you found it too expensive?

Mr Hirst —Yes. It was uneconomical for us.

CHAIR —There were other options that were more—

Mr Hirst —We made a decision very early on that we could not rely on anybody else to get us through and that we needed to operate within our own financial resources. As a result of that, we did not take on the guarantee.

CHAIR —So, even if it had been priced the same, do you think you would have made the same decision?

Mr Hirst —I think if it had been priced economically then we would have made a different decision.

CHAIR —Okay. Thank you.

Senator XENOPHON —Chair, just a quick question. Mr Hirst, if it had been priced at the same level for Bendigo Bank as for the four big banks, would you have taken it on?

Mr Hirst —I think we probably would have.

Senator XENOPHON —Thanks.

CHAIR —You quite correctly, in my view, note that competition is not all about price; there are a whole suite of factors that any business can compete on when trying to attract custom. Quite clearly, Bendigo Bank, together now with Adelaide Bank, have identified a market niche which you are filling and competing for in your own way, which is quite different, certainly, from what the major banks do, and probably any other financial institution in the country. But, in that context, you indicated that the non-bank institutions collapsed because they were competing solely on price—because that was their sole focus.

All the evidence we have had so far suggests that they collapsed because they could no longer get access to wholesale funding at all, at any price. Are you saying that their reliance on cheap securitisation enabling them to compete on price was the reason? I guess what I am saying is that the evidence we have had is that they fell over because they could not get the funds, not because they were solely competing on price.

Mr Hirst —Well, that would be their view, obviously. My view is that they had a very single focused business model, it was based purely on price, and many of them funded themselves very short for long-term funding so that they could push that price down further. Because of that model that they ran, when there was no funding available they collapsed. I would question whether or not they could return in the same way, given the experience they had.

CHAIR —I do not think that conclusion is any different to what we have heard. The securitisation market, from the evidence we have received this week, particularly from the Reserve Bank, is getting close to around half what it was pre GFC, and most of that is domestic, with very little interest from the international market. Short of some innovative product being offered, given the brand damage particularly of RMBS, there does not seem to be a lot of potential appetite for that in the coming years either. Would you disagree with that?

Mr Hirst —Probably not. I think the experience for securitisation overseas was very different to the experience for securitisation in Australia. In Australia nobody has ever lost a dollar investing in RMBS. The reason that the securitisation market disappeared in Australia for new funding was because there were so many organisations overseas who held Australian securitised paper that when they got into trouble they were distressed sellers of that paper. So they were returning all of that market to domestic investors and because they were distressed sellers they were selling it at 200 over, 300 over, and nobody could issue new RMBS at an economic level. So as soon as that secondary market overhang is cleared, that is when we have seen, with the assistance of the AOFM, some demand come back in.

CHAIR —In terms of the international appetite? The Reserve Bank indicated that they thought a lot of the investor interest was coming from institutions that had unsustainable business models and that they are unlikely to be returning to the market any time in the future.

Mr Hirst —I think some of it will have to do with whether or not that is true and those institutions are around; some of it will have to do with how RMBS gets treated in liquidity under Basel III, because if it is part of liquidity there will be a demand for it and therefore—

CHAIR —Quite clearly, that would change the baseline.

Mr Hirst —That is right. Domestically, we did a billion-dollar issue last week. It had some fixed tranches in it to try and open up the style of investor that we could get in, and we did get some, albeit muted, demand from overseas.

CHAIR —While we are on that, you also made the comment that there must be no impediments to access to finance or to funds for the banks. What impediments do you think currently exist and how can we remove them?

Mr Hirst —One of the issues we have is that as an economy we fund a fair bit of our activity from overseas. Most of that gets raised through the banks, and that is clearly one of the banks’ roles in the economy. But at some stage issues are going to arise around appetite for individual names. I am heartened to see that there are now corporates going to offshore markets in their own name. That will alleviate some of that situation. But we do need a big increase in domestic appetite for fixed interest.

Our fixed interest market relative to our equity market is quite small on international standards. That is the case even though we have got a terrific savings pool in superannuation. Unless we can get a domestic fixed interest market of substance up and running, we are going to remain hostage to offshore investors, we are going to be reasonably inefficient as an economy because there will be more going into equity and we will not be leveraging to the appropriate amount we should, and there will be some restriction on funding for lower rated institutions—and they are not lower rated because they are more risky; they are lower rated because they are small.

CHAIR —I will move on to the Treasurer’s reform package that was announced on Sunday. You have been quoted as making some statements on that in public. What are your thoughts, for the benefit of the committee, regarding that reform package and its ability to improve competition, in the way that you define it, and deliver benefits to Australian consumers?

Mr Hirst —I think on balance it is positive. First of all, it raises the issue of competition and choice and puts on the horizon for people that there are—

CHAIR —That has been firmly raised in the last couple of months anyway, I would have thought.

Mr Hirst —That is true. We think the package probably has something for everybody. Not everybody is going to like everything that is in it. From our point of view, there are five things in it that we think are helpful. The first is the boost in the flexibility of transferring deposits and mortgages. Clearly when you have the highest customer satisfaction in the market you would expect to be a net beneficiary of that, and in fact we know that 20 per cent of people who are looking to change banks are looking to change to us. So that would be a big plus for us.

The continuation of the Financial Claims Scheme I think is good for all small institutions. There is no doubt that in the GFC some people experienced a flight to quality. The additional money for the RMBS is helpful. As we move through new raisings with the AOFM, the AOFM are taking less and less of the total deal, so something like $4 billion can probably be leveraged up to $12 billion in total issuance. In terms of the bullet bond structures, we have already achieved that.

I think it is reasonable for us to have covered bonds. Initially we were against it. We felt that it played into the hands of the majors and would again give them preferred access to funding and allow them to grab that market share, but I have come to the view now that, the more funding we can make available for the whole system, the more likely it is that those institutions who are high rated will use those wholesale markets, and that will free up some of the irrational pricing that is currently being seen in term deposit markets. Then, of course, the commitment for the fixed interest market is obviously something that—

CHAIR —Is there anything you do not like?

Mr Hirst —If we were to end up mandating account number portability, that would be very difficult but I think it can be achieved in other ways. I think the anticompetitive price signalling is going to be difficult. Most of the time when I talk about funding costs it is in answering a question for investment analysts. Without knowing what the legislation is going to look like, I would be concerned that it would reduce transparency for the investor market.

CHAIR —You raised the issue of investment analysts. I have a copy of an analysis conducted on Monday by Credit Suisse of the government’s competition reforms, and they conclude, if anything, major banks are perhaps long-term relative winners from the reforms. They say that they see regional banks are ‘not unequivocal winners’ from the reforms because you are relatively more exposed to reforms to increase mortgage competition and also to the fixed IT costs associated with potential deposit account portability reforms. Do you agree with their conclusion?

Mr Hirst  —I do not agree with their conclusion. I agree that we would be relatively more disadvantaged if account number portability were forced on us and we did not see some other way. I think increasing choice in mortgages and transaction accounts will play into our hands. You could go either way on the covered bonds issue.

CHAIR —I also note that they recommended Bendigo Bank over one of your competitors. In the context of this, they thought it would probably benefit you more than one of your competitors.

Senator HURLEY —Thank you, Mr Hirst. We have had the non-banking sector, particularly Mr Symond, being very—well, not very critical but saying that the smaller banks did not do anything to reduce interest rates and were not very significant in the equation, and the major banks also implying something similar. So I guess you are caught between those ends of the spectrum. You have partially answered where you fit in by saying it is not about price and it should not be solely about price but that you add choice and value. That is very certainly true in the regional areas. I am from South Australia and we have Bendigo and Adelaide branches in South Australia which are well supported I think because they local and are giving good service. I suppose any government support for your bank in particular shores up competition; it does not necessarily increase competition. So I am wondering how you see the recent government moves—whether they do not only shore up essential parts of the banking spectrum like your bank but also help to at least create the possibility of entry for other people. I am thinking particularly of areas like the securitisation market and the initiatives in things like ‘bullet’ RMBS. What is your attitude to instruments like that? Would you use them? Have you used them?

Mr Hirst —If I could work backwards on the question: as I said earlier, we did an issue last week that included two bullet tranches of RMBS. The reason we are doing that is that we feel that it will open up those people who are prepared to invest in RMBS because they do not have the prepayment risk or the tail risk associated with traditional structures. So, from that point of view, we think that is a plus, and we think that it will help us access more funding. We think the whole AOFM program for RMBS will certainly help restore that market. We would want to see that continue until that market was restored.

Senator HURLEY —Mr Symond also said that it was not enough—that you would need $30 billion to $40 billion a year in that market. Do you?

Mr Hirst —I noticed that either Mr Laker or Mr Stevens felt that one of the issues that we had is that we had had too much access to credit at times. I think the market will find its own level and should be allowed to find its own level on that.

In respect of the issue of price, even though we do not compete on price, we are always competitive on price. If I have a look at our home loan rate at the moment, we are higher than NAB, the same as ANZ and cheaper than CBA and Westpac. So, from that point of view, whilst we will not always be the cheapest we will certainly always be competitive.

Senator HURLEY —Being competitive is always dependent on whether you can be, and you mentioned that in terms of the costs of your funds. Apart from deposits, of course, you get funds in those markets like the securitisation markets, and you mentioned the RMBS. I was not quite sure how the corporate bonds fitted in there for you. Could you just run through that and perhaps talk about the recent government initiatives in that?

Mr Hirst —It is really more an issue of increasing the size of fixed interest investment. That obviously is a two-way street: there need to be instruments for people to invest in and there need to be investors who are prepared to do that. The broader the participants that you have in that market, from an issuing sense, the more likely you are to get people prepared to invest in that market, because it will be a more liquid market.

I think fixed interest is important for another reason domestically, and that is: as our workforce moves from the contribution part of superannuation into the draw-down part of superannuation, it is very important that they have access to capital preserved products as opposed to capital growth products. We have seen, just in the last few years, the number of people who retired and then had to re-enter the workforce because they did not have an appropriate mix of defensive and aggressive assets within their superannuation.

Senator HURLEY —That is clearly very critical as we are most certainly moving into that stage. Your involvement in that is as part of the broader financial market but also in providing advice and assistance to those clients who might be in that position. In other words, are you entering into that wealth management area as well?

Mr Hirst —We are seeking to enter into it. We do have a branch based planner of business. We have about 50 or 60 planners. We think that the mood of change around the Cooper report on superannuation will be positive for the environment or for the economy and that a branch network such as ours would be ideally suited to distributing the low advice, no advice type product that probably 80 per cent of people need.

Senator HURLEY —I asked NAB what percentage of their total income was comprised of wealth management. Can you tell me what it is for you?

Mr Hirst —It depends how you define it. If we include in our wealth management our funds management business, our planning business, our relationships with planners and platforms through term deposits and margin lending, on that basis—I do not know this for certain—it would be around 20 to 25 per cent.

Senator HURLEY —And that is clearly going to assist banks like yours, particularly in regional areas, where people will come in and get that advice.

Mr Hirst —I think it will assist in terms of providing low advice in places that are reasonably remote and do not have a lot of financial planners and other professionals to advise them. As we work through it, I think it will require some wind-back of FSR. But I think that would make sense given where that report is headed.

Senator HURLEY —Thank you, Mr Hirst.

Senator XENOPHON —Mr Hirst, on Monday—the day after the Treasurer’s announcement—the stock market seemed to react; its initial reaction was to give a tick to the big four and to give a reduction in the share price both for your bank and the Bank of Queensland in particular. Does that indicate the sentiment that there was not much in this package for the regional banks and the foreign owned banks—the so-called second-tier banks?

Mr Hirst —What it indicates is that there was not as much in the package as what had been mooted in the paper in the two weeks leading up to it when our share price had run up by 60c and 70c. I actually spoke to a group of investors in Sydney in the middle of last week and said, ‘If our share price is rising as quickly as it is because of expectations of what is going to be in the package, then I think the market has got it wrong.’ The reversal you saw on Monday was the market admitting they got it wrong.

Senator XENOPHON —And it is your view that there is not a level regulatory playing field. I do not want to use ‘second-tier banks’ as a pejorative term, but do you consider that banks such as yours—the regional banks, not the big four—are being discriminated against or are at a disadvantage in a regulatory sense?

Mr Hirst —I think there are a number of things that could happen on the regulatory front that would help the second-tier banks. One of the issues that we face is that we have to hold twice as much capital to support a mortgage as what the major banks do because of the different approaches we have to measuring our capital adequacy.

Senator XENOPHON —You do not think that is fair from a risk or a safety point of view?

Mr Hirst —No. I think a mortgage is a mortgage, and we have got a $15 billion mortgage book, so it is hard to imagine that the risk in our book is not pretty much the same as the risk in the majors’ book. It is statistically valid.

Senator XENOPHON —What is the reason for that?

Mr Hirst —The reason for it is that the majors are on what is called the advanced model. They have to take additional capital charges elsewhere in their business for operational risk, and they do that because of the model they take. I guess what we would say is that, if we moved to the advanced model, we would also have to take an additional capital charge for operational risk, but that charge would be nowhere near what it is for the major banks because of the simplicity of our business.

Senator XENOPHON —And when you and other non-big-four banks raise this, what sort of response do you get, either at a government level or at a regulatory level?

Mr Hirst —The regulator quite rightly says that if we wish to move on to the advanced model, we can. We have started down that path, but it is a two- or three-year path.

Senator XENOPHON —Two further quick questions because of the time constraints. Bendigo & Adelaide Bank is quite keen to explore the Canadian mortgage model as a way forward. Is that correct?

Mr Hirst —That is correct. We think that model has proven to be very resilient during the global financial crisis. You would think if anyone was going to be impacted by issues around securitisation it would have been Canada because they are right next door to where the major securitisation issues were. Yet it got through that period very well and continues to do well.

Senator XENOPHON —Finally, in general terms how much has your bank’s cost of funds increased since June 2007? That is the reason given by other banks for increasing above the RBA’s cash rate. To what extent are your funding pressures on the cost of funding greater, equal to or less than those of the big four?

Mr Hirst —It is somewhere between 130 and 140 basis points.

Senator XENOPHON —More than the big four?

Mr Hirst —No, not more than the big four; more than where we were before the global financial crisis. As we sit here today, we probably fund ourselves, as long as the AOFM continues with the RMBS market, at about the same level as the major banks. We all compete on the same price more or less in the term deposits and the retail market. Our weighted average cost of funds on the AOFM deal that we did last week was about 115 basis points, which is about where the majors raise three- to five-year money. The problem is not so much price at the moment, it is the volume and the access that is the issue. Until that securitisation market comes back, that is going to be a problem.

Senator XENOPHON —So do you agree, to paraphrase John Symond from Aussie Home Loans yesterday, that all of these other reforms are tinkering around the edges in a sense compared to sorting out the issue of securitisation?

Mr Hirst —No, not necessarily, because, as I said in my opening remarks, I look at competition across a whole lot of different factors and so all of those need to be looked through. But I guess the major problem right now is the volume of funding that is available to non-major banks. You asked me earlier about the regulatory issues. Another issue that would help the RMBS market and is a regulatory issue would be allowing RMBS to be part of banks’ liquidity holdings. If that were able to be done then that creates a natural demand for RMBS and gets that market up and running.

Senator XENOPHON —Would Basel III allow that?

Mr Hirst —Basel III has outlawed securitisation in terms of being available for liquidity but you can understand why that would be the case, because the performance of securitisation in offshore markets has been abysmal. That has not been the case in Australia, and I think one of the things that we should be considering in localising those rules is allowing RMBS to be part of liquidity, allowing the term debt of all ADIs to be eligible for repurchase at the Reserve Bank.

CHAIR —We should know by Christmas.

Mr Hirst —Sure.

Senator XENOPHON —In essence, then, are Australian banks, and through the banks consumers, going to cop it in the neck through Basel III rules because the securitisation markets in other markets have not worked that well, they have been lax overseas? Are we going to cop it as part of the collateral damage of being part of Basel III?

Mr Hirst —We are certainly disadvantaged to some degree.

Senator McGAURAN —Given that you say there are many factors to competition and one definitely is many players, and that is what I would like to see in the market, can you give me a sense of the mood of the market? Given that your bank is a prime target for a takeover, if not the last of the great takeovers, what is the sense of the market: are the sharks always circling, or is it the end of the takeover period?

Mr Hirst —I think mergers and acquisitions generally occur as a result of a shock to the economy and when funding becomes available to enable those to happen on the other side of that shock, so we are probably moving into that M&A period now. Having said that, I do not have a sense of sharks circling. We have a very valued proposition by our shareholders and our customers in the communities in which we operate. I think that, as long as we are able to continue to do that and perform at a level that is profitable for our shareholders, we have a place in the economy.

Senator McGAURAN —Have you met with the ACCC to discuss these matters? I do not know if that is wholly appropriate; I should imagine it is. Have the ACCC in any way signalled that this is really the end of the takeovers, given that I seem to take their signals as being that is what they are saying, that they did not like the last one they did, St George? So is there almost protection at least for the moment—the moment being five years perhaps—around your bank so it is safe from takeover? Have the ACCC sent you that message?

Mr Hirst —No, they haven’t and I haven’t met with the ACCC.

Senator PRATT —Mr Hirst, you have already made some comments about the banking competition package but I am interested to know which elements within it you think will actually contribute to competition.

Mr Hirst —I think on a broad basis, rather than just for ourselves, the ability to transfer deposits and mortgages is a very good one. I think there is the community awareness campaign, and the financial claim scheme certainly is a good one, then the RMBS, the bullet bond structures and the emphasis on a fixed interest market.

Senator PRATT —So they are all things that you think will enhance competition and therefore, notwithstanding the cost of funds and the underlying other internal costs of each institution, they are the things that will keep the services that banks and other financial institutions are offering competitive with each other.

Mr Hirst —I certainly think that they will help.

Senator PRATT —I would like to ask you this. Do you think the Treasurer ever said that this banking reform package would actually reduce interest rates? I think he has been verballed on that.

Mr Hirst —There clearly needs to be a distinction between the rates that are charged on loans and paid on deposits and the official cash rate. They are related in some way but they are not directly related. The official cash rate has no spread on it for risk and it is really the risk element that has pushed up the pricing of loans, rather than the absolute level of interest rates.

Senator PRATT —So what is your opinion of what you think the Treasurer is trying to achieve with this package?

Mr Hirst —I think he is trying to make sure that there is competition in the market so that communities and individuals in communities have access to banking services. Banks play a very important role in the economy and it is such an important role that, on a bipartisan basis, we were prepared to guarantee it. So, from that point of view, we are trying to make sure that in a fair economy everyone has access to banking facilities.

Senator PRATT —So you would or would not agree—and I suspect I know the answer to this—with John Symond’s assessment of the Treasurer’s banking competition package yesterday in evidence.

Mr Hirst —I have not had a lot of time to read what Mr Symond had to say. I think that to some degree it is hard to know where he comes from given that he is 33 per cent owned by major bank.

Senator PRATT —Can I ask you about the significance of the RMBS market and the government’s support for that. As I understand it, it came in in block phases—$8 billion, $8 billion. What is the significance of that commitment thus far and what values will the further $4 billion add?

Mr Hirst —It has certainly been significant in making funding available for those who could not access wholesale funding in their own name or use the government guarantee. It is a very important market for the economy and, to the extent that it provides liquidity and deals in that market, it is extremely worthwhile. The initial deals that were done were almost solely funded by AOFM, but as we have moved through time they are taking less and less of the share of a deal. I think they took about 50 per cent of our last one. On that basis, the $4 billion that was provided in this package on Sunday should equate to at least $8 billion in funding.

Senator PRATT —That is access to funding. What impact does that have on the price of that funding?

Mr Hirst —Again, if you have a strong cornerstone bid for a deal then that will drive price down to the extent that it increases liquidity and increases demand, and that drives price down as well. But the price has got a hell of a long way to go before it gets back to where it was.

Senator PRATT —So you would agree on that basis that it allows institutions like yours to be more competitive with the big four banks?

Mr Hirst —It allows us to take advantage of the opportunity that we have created. To the extent that we do not have access to that market, then it limits our opportunity.

Senator PRATT —And you do not have a problem with institutions that have, I suppose, a fair proportion of that market? If the big four have a large ownership share in such institutions, do you think that they should be excluded from participating in the RMBS?

Mr Hirst —My problem with some of those institutions is, as I have outlined before, that they play simply on price; they do not have sustainable business models. I think to the extent that one is significantly owned by a major bank then the major bank should look after it.

Senator PRATT —You can see that with the business models in terms of the kinds of products that they offer as brokers et cetera, can’t you?

Mr Hirst —Yes.

Senator PRATT —I think we have had a little bit of commentary on the capacity of customers to switch. How do you think you will be placed in terms of the promotion of competition there?

Mr Hirst —Given our customer satisfaction rating, we would expect to be a net recipient of that. We think that we do not need account number portability to do it. We think there are other ways to do it. and we are working on a couple of prototypes which we are prepared to share with the industry. From a mortgage point of view, there is currently a project about electronic or e-conveyancing. If the industry could get together and for the 80 per cent of people who just need a standard, everyday mortgage agree to the terms of what an industry mortgage might look like, we can put that into an e-conveyancing project. So if you wanted to swap from Westpac to us it would simply be a matter of it happening in a central electronic register. This reduces an enormous amount of the cost in the industry, and I think it would pretty much fall straight to the price.

Senator PRATT —Terrific. It sounds like a good thing to me.

CHAIR —One final question: you mentioned in response to my earlier question that on balance you think the reforms are positive. Do you think that they are likely to make a significant difference or just a positive difference to competition?

Mr Hirst —I think we will only know with time.

CHAIR —Thank you. And thank you, Mr Hirst, for your time in assisting us.

[1.54 pm]