Most agree that competition in the Australian financial sector has been destroyed over the past year, as the Big 4 have trampled second-tier financial institutions underfoot in the wake of the global financial crisis.
The demise of securitisation markets, takeovers of smaller rivals and the climate-of-fear driven belief of many consumers that “anyone other than a big bank is dodgy” have seen the Big 4’s market share rise dramatically. According to APRA sourced data, Commonwealth Bank and Westpac and their subsidiaries now control over 85% of all new mortgages and almost 50% of existing mortgages in Australia.
The banks have already begun posturing, raising interest rates independent of the cash rate. The official excuse is that “the costs of sourcing funding remain high” while simultaneously they raise billions of dollars through share and debt issues and buy up smaller competitors to further consolidate their size and strength.
As recently pointed out in articles by Bernard Keane, there is a distinct lack of concern by government for this strengthening oligarchy developing in our nation. This creates a longer-term problem as our dependence on these few institutions is increased. Other lenders are simply disappearing, unable to secure funds.
If lenders are struggling to source deposits, why are we not looking at the biggest deposit scheme we have, our superannuation contributions? Several hundreds of millions of dollars are contributed each month to superannuation, underpinned by tax concessions and our 9% super guarantee. The top-five industry funds have about $86 billion in Funds Under Management. These super funds should consider using some of this to invest in first mortgages, a long-term, stable income stream.
There are several ways this could be done. They could do this directly by offering mortgages to the public, although this would take some restructuring of administration and service support. They could use a distribution channel such as a broker network, which would increase their national exposure. They could also provide the funding to those with an existing framework, such as credit unions or mortgage managers, those who are often overlooked in today’s market.
The mortgages can then be securitised into a mortgage fund and this can be offered as a stable investment option for members of the super fund. The loans are secured against Australian property, the stable bricks and mortar we all live and work in. This is visible, tangible and more transparent than some of the “unlisted infrastructure” assets these industry funds currently own.
There are those who believe securitisation is a dirty word, however this is not the Australian experience. There are also those who scream residential property is going to collapse, but recent economic data and history suggest otherwise. Superannuation is a highly regulated, highly monitored vehicle, which would avoid any repeat of the United States’ short-term, profit-driven mistakes. The loans will be first registered mortgages, not sub prime or impaired loans of any kind.
The danger period for the financial crisis has passed. The Australian government now needs to look at re-introducing competition to the financial sector for the benefit of us all.
Adam Barker is a lending adviser at Prescott Securities.
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