In an Issues Paper distributed to Corporate members in May 2011, author Dr Penny Neal considers competition in the banking sector, recent consolidation in the banking sector and implications for customers and appropriate policy responses to drive competition in the banking sector.

The decision by the major Australian banks to raise home loan interest rates by substantially more than the increase in the Reserve Bank’s cash rate in November 2010 caused widespread outrage across the community.  The aim of the paper is to take a balanced view and look behind the rhetoric and populist responses engendered by the backlash against the major banks to examine whether the Australian banking sector has become less competitive post the Global Financial Crisis. The paper also seeks to critically assess the policy responses that have been proposed.

A major conclusion of the paper is that policy responses to support access by the regional banks and the mutual sector to the securitisation and wholesale markets are key to driving competition in the banking sector.