Banking competition must increase

ANZ chief executive Mike Smith doesn’t get it. Why do we need an inquiry in to the banking sector, he wonders?

“I’m just wondering what all the fuss is about,” Smith told reporters yesterday.

“What is the issue? The system is not broken; in fact, the system is in extremely good shape. The banks in Australia are strong, they are profitable.”

From Smith’s point of view, the banking system looks brilliant. Yesterday, Smith unveiled a 50% increase in cash profit, which topped $5.1 billion for 2009-10. Nothing to see here; everything looks great.

Except that it’s not.

The results of our survey of the Smart 50 – the cream of Australia’s SME community – showed that many have all but given up on getting bank finance to fund growth. PwC’s latest survey of private companies suggested a similar thing.

While the big banks say they are lending to SMEs, and the bald lending numbers support this, the issue is that they are still being very, very selective about who they lend to.

Start-ups, smaller firms, and companies in certain sectors (property is a big one) are still struggling to get cash.

The problem, as new Small Business Minister Nick Sherry eloquently explained to SmartCompany earlier this month, is that the smaller specialist bankers have disappeared from the market, and are no longer filling the niches that the big banks are steering clear of.

We need to find out why, and what can be done about it. Let’s look at fees, and the competitive state of the market, and let’s help people understand how the sector works.

The bankers will say that this has all been done before, but so what? The public doesn’t understand how a bank such as ANZ can produce a $5.1 billion profit and then bleat about rising funding costs. The banks need to do a better job of explaining that to households and business.

As independent senator Nick Xenophon told Bloomberg yesterday: “There’s nothing wrong with a bank making a healthy profit; the issue is if those profits are a result of an environment that is not as fully competitive as it should be.”

The banking sector needs to realise this is not about eating into their profits, or pulling apart Australia’s strong banking system. This is about finding ways to make the system better.

And the banks should probably be careful about how loudly they protest. The mining sector provides a great example of how opinion poll-driven politicians can suddenly start thinking a super profits tax is a good idea.