Australian Treasurer: cracking down on bank fees

11th February 2008
By Petter Ingemarsson

The Australian Treasurer is prioritizing legislation that would restrict bank switching fees.

Australian banks have been accused of making unjustified increases on standard home loan rates, which are higher than the Reserve Bank interest rate rises. In light of this, the Australian Treasurer is moving on legislation that would reduce switching fees for mortgages. However, it is questionable whether increased regulation of banks really can ameliorate housing affordability.

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The Commonwealth Bank (CBA) has raised its standard variable rates by 30 basis points, following the Reserve Bank's (RBA) recent decision to raise the official cash rate target by 25 basis points to 7.00%. Since the CBA raise is greater then the RBA raise, the bank has been criticized for profiteering on the rising interest rate environment. The CBA standard variable rate now stands at 8.97%, with other banks widely expected to follow suit. However, the bank has defended the move by pointing to rising funding costs in the wake of the global credit crisis.

Treasurer Wayne Swan is meeting with key financial advisors and regulators in order to iron out the details on a plan to increase flexibility for home loan borrowers. The Treasurer has indicated that switching fees for changing lender or type of loan are of particular interest for regulators. These fees, which can go as high as A$2,000, are perceived as tying a borrower to a particular loan. By eliminating switching fees, the Treasurer hopes to increase competition between banks and ultimately reduce the strain on mortgagors.

Although greater lender competition is obviously in the interest of Australian mortgagors, it is questionable whether the proposed regulation can bring this competition about, or whether this can ease the plight of stressed Australian mortgagors. Bank switching fees are a relatively minor component in the housing affordability crisis, albeit a highly publicized one, as government charges and red tape can impose greater costs on housing purchase and refinancing. Moreover, financial institutions will almost certainly react to legislation, for example by raising other charges or rates. As a result, the short-term outlook for Australian mortgagors continues to be bleak.
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