The worrying consequences of abolishing exit fees: Bartholomeusz

Goldman Sachs has produced a couple of pieces of research that ought to be required reading for all the politicians currently engaged in big bank bashing. It confirms that there is a law of unintended consequences when the political desire to be seen to be doing something overwhelms other considerations.

As discussed yesterday, the Australian Securities and Investment’s Commission’s guidelines on mortgage exit fees – and its threat to take legal action against fees that don’t reflect actual losses – and ANZ Bank’s decision to simply abolish them has the potential to actually strengthen the major banks’ dominance of the financial system, not weaken it.

Goldman’s banking analysts Ben Koo, Elizabeth Rodgers and Jennifer Lowry have provided the detail that supports that case. They estimate that ANZ’s abolition of exit fees will cost the bank about $92 million, or 1.1% of its cash earnings. If all the majors follow its lead the losses would be $618 million, or 1.7 per cent of the banks’ aggregate cash earnings.

The biggest impact, naturally, would fall on the biggest mortgage lenders, CBA and Westpac. Abolition of the fees would cost CBA $180 million a year, or 1.8% of cash earnings, and Westpac $249 million, or 2.7% of cash earnings. NAB would lose $96 million, or 1.2% of earnings.

That might sound like a material impact on the majors but Goldman’s analysis shows that it would have a much larger relative effect on the regional banks than the majors. Suncorp would only lose 1.5 per cent of its cash earnings but Bendigo and Adelaide would lose 4 per cent and Bank of Queensland 6.9%.

The effect on non-banks would be even more profound, given that on average their exit fees are about 2.7 times those of the majors. Plus, as discussed yesterday, the abolition of exit fees and increased rates of switching and early repayment could make it difficult for the regionals and non-banks to access securitisation markets.

In other words, in seeking to discipline/punish the big banks the policymakers are actually damaging their competitors more and undermining the potential for non-banks to re-emerge as a source of real competition.

The Goldman analysts also help put the impact of ANZ’s announcement yesterday – a 39 basis point increase in its standard variable rate mortgage, the abolition of exit fees, a special three-year fixed rate offer at a 70 basis point discount to the standard variable rate until the end of the year and $1600 of discounts and subsidies for those to take up that offer – into perspective.

On Goldman’s numbers, the above-cycle rate rise will generate an extra $250 million of revenue. The loss of exit fees will cost it less than $50 million, while the other measures will produce offsetting gains or losses. A 50 basis point increase in the rate paid on its Progress Saver accounts will cost a further $18 million.

The crackdown on exit fees which led to ANZ’s decision to simply abolish them would have been factored into the degree to which it increased its standard variable rate. With the lowest mortgage market share, ANZ wasn’t under the same pressure as CBA or Westpac to claw back net interest margin on its home loan book.

By demonising exit fees the big bank bashers have probably led to those ANZ customers who had no intention of switching in the next few years – which would be most of them – paying a material amount more for their home loans than if the exit fees had never become an issue.

Joe Hockey talks about regulating banks as akin to squeezing a balloon, saying that if you push it at one point it bulges at another. In fact it is more complicated than that, given that the impacts of the actions of the majors – or policy actions that affects them – aren’t confined to their balance sheets and earnings but ripple through the wider financial system.

If the majors were gouging their customers and the smaller banks and non-banks weren’t handicapped by access to funding, more attractive margins would attract more competition and the market would discipline the majors’ pricing.

Now, even if they can source competitive funding, the smaller banks and non-banks are facing the loss of most of their exit fees and a consequent increase in customer churn. That won’t help promote competition. That’s an unintended consequence.

This article first appeared on Business Spectator.