Aussie banks need prosecuting for misuse of power – lobby group

Misuse of market power is being levelled at the big four Australian-owned banks by lobby group Banking Reform Coalition. It wants the Commerce Commission to prosecute.

It is framing the banking sector’s record profits of $7.22 billion during last year’s recession as illegal and an abuse of market power at the expense of smaller New Zealand competitors, whose profits dropped on just about every metric.

Coalition head Kent Duston says It is not about the ComCom doing another market study, it is about enforcement of the Commerce Act.

“This is about the regulator taking action to fix the problems and the exploitative behaviour. It is well overdue, particularly when the Australian-owned banks control more than 90% of the mortgage market.”

The coalition believes the commission should use section 36 of the Commerce Act to bring the banks to heel.

The act prohibits a business with a substantial degree of power in a market from engaging in conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market.

Maximum penalties for a firm are the greater of $10 million, three times the commercial gain, or 10% of turnover in each accounting period in which the breach occurred. The ComCom can also accept enforceable undertakings to avoid, remedy or mitigate any adverse effects of a firm’s conduct.

Duston, who is meeting with the ComCom this month about enforcement of the act, says it needs to take a hard look at the rising profits and return on equity the ANZ, Westpac, BNZ and ASB made during the recession and why it happened.

“Their smaller competitors fell by the wayside.

Compared to international benchmarks, the four big banks are 50-100% more profitable than they should be, the coalition says. 

By its calculations, using publicly available information, the big four banks are taking about $7.2 billion a year out of the economy – about $20 million a day.

That is unearned and unjustified profit, Duston says, made up of the high mortgage interest rates, excessive PayWave fees, the stratospheric credit card interest, and the pitiful savings interest.

“If money was still a physical thing, there would be airbuses full of dollar notes just flying across the Tasman constantly.

“All up the banks made about $6.5 million they are not entitled to. They didn’t earn it. They didn’t make it because they have amazing customer service or incredible innovation. They just did it because they can,”

In economic terms, he said that exerts $10 billion worth of dead weight losses in the New Zealand economy. It’s the sand in the gears.

This year alone the banks have already made about $6.5 million in profit by delaying passing on the OCR drops to mortgage borrowers.

The coalition’s calculations show that delaying the 50 basis points OCR drop two months ago, the major banks made an extra $5 million. Using the same calculations and considering the shorter delays and less of a rate drop, the banks still made $1.6 million from the most recent OCR decision. Another OCR drop is expected at the end of this month.

“All up the banks made about $6.5 million they are not entitled to. They didn’t earn it. They didn’t make it because they have amazing customer service or incredible innovation. They just did it because they can,” Duston says.

The Commerce Commission commissioned a piece of work from Auckland University’s Business School as part of its bank market study last year and asked it to look at this issue and its analysis was ‘rockets up, feathers down’, he said

When looking at the long run analysis over four months, and allowing for fixed rate changes, banks had passed on 90% of the OCR increases but only 57% of the decreases.

“What this does is inflates profits for banks,” he said.

This was also affecting the country’s productivity, according to the coalition.

Participants in KPMG’s most recent Financial Institutions Performance Survey (FIPS) were concerned about the state of the economy, a lack of productivity and a feeling the country needed to change and move away from the heavy focus on risk management to more of a ‘can-do’ or ‘yes’ mantra.

This was a refrain repeated by the OECD, Finance Minister Nicola Willis and various economic commentators.

One of the reasons for the country’s productivity problems, Duston said, was because the country was exporting too much capital. “We are allowing the banks to effectively conduct a looting operation against the productive sectors of the economy.”

Action needed to be taken sooner rather than later because this was not going to fix itself, the coalition says.