COMMONWEALTH BANK CFO, ROB JESUDASON: Thank you for the opportunity to discuss your report and share our views.
We recognise that at any point in the economic cycle, there will be opportunity for regulatory change. We support balanced regulatory change which increases competition and encourages innovation.
We are supportive of the recommendations of the Financial System Inquiry which led to many reforms, and we look forward to seeing how these reforms ultimately play out.
We also support the majority of the Productivity Commission’s draft recommendations.
We believe a highly competitive banking system that balances system stability, prudential supervision and customer protection through the cycle is good for customers.
We’re fortunate in Australia that we are one of the most stable banking systems in the world. It is also highly innovative and competitive, and customers have high levels of choice and they also receive high degrees of service.
You can see this in the fact that customer satisfaction has improved to over 80 per cent for the major banks and there is a decreasing trend of dissatisfaction which sits at roughly five per cent today.
Our primary goal is to secure and enhance the financial wellbeing of people, businesses and communities. This guides us to be highly customer-centric.
However, it’s important to get the balance right between delivering a highly competitive value proposition to customers and ensure fiscally responsible management of Australia’s largest financial institution.
In the last five years, we have invested more than $6 billion in improving the Commonwealth Bank franchise. Our scale and profitability enables that investment.
We believe Australia’s regulatory framework is superior to most mature markets.
We support the clear division of accountability between the Reserve Bank, APRA and ASIC. It ensures a system that is stable, with strong prudential strength and also strong customer protection.
We also support the role of the Council of Financial Regulators to balance these objectives. It ensures Australia’s economic prosperity, and the financial wellbeing of customers.
This system has worked. It has contributed greatly to the prosperity of the country and it’s also recognised externally.
In November, the CEO of Standard & Poor's said the regulations governing Australia's banks are amongst the strongest in the world.
Therefore, it’s important that the discussion about competition must not lose sight of two fundamental characteristics of the market:
Firstly, the nation's economic prosperity relies on access to global funding markets. This has been achieved through stable banks with sufficient scale to fund the economy. We saw through the global financial crisis that funding markets can be highly volatile. The strength of our system enabled the major banks during this period to continue to extend credit to individuals and businesses.
This is an important consideration for Australia because the contribution of the banks to facilitating private sector growth is much higher than most other mature markets.
To put this in perspective, the major banks alone raised almost $100 billion of long term wholesale funding in offshore markets last year. During this period, CBA raised $27 billion in long term offshore wholesale funding offshore. We also renewed $32 billion of offshore wholesale funding in terms of short term debt. This was renewed every month.
This ability to access offshore markets at scale was critical to enable CBA to provide $135 billion in new lending to Australian customers.
The second consideration is that Australia has enjoyed over 26 years of uninterrupted economic growth. This is globally unprecedented. Given the procyclical nature of banking, it has naturally led to strong performance of the Australian banks.
It should not be ignored that the profits of major banks have in turn benefitted the wider community. Approximately 75 to 80 per cent of profits are returned to shareholders as dividends, and the major banks are also amongst the nation’s largest taxpayers.
However, at some point in the future, Australia will experience a recession. When this happens, Australia’s regulatory settings must ensure that the financial system has the strength and stability to absorb losses.
The global financial crisis gave us clear evidence of how banking systems with regulatory settings not attuned to macro-economic downturns can ultimately fail to protect consumers. Governments in the UK, US and Europe were required to bail out major banks or in some cases let them fail. This is in contrast to Australia. Our major banks were not only able help the economy avoid the consequences of bank failures, they were also able to continue extending credit to consumers and businesses. There were also no bank failures.
On this basis, we support most of the Commission’s recommendations. However, we encourage caution with regard to three matters:
Firstly, the proposal to abolish interchange fees. The payment system is critical infrastructure for the country. Investment is necessary to provide security, stability and continuous innovation. There have been successive reforms that have aimed to optimise interchange. Australia’s interchange fees are low by global standards. In our opinion, there should be no further changes to these regulations until the RBA has had the opportunity to evaluate the effects of the most recent reforms introduced last year.
Secondly, the proposal for APRA to develop an online tool to report median interest rates on housing loans. Our concern is this will likely have a number of significant unintended consequences.
Mortgage pricing is determined by a number of factors, including a risk assessment of individual customers and external factors such as wholesale funding costs. Publishing historical median interest rates without the relevant personal context could mislead customers.
Lastly, the proposal related to mortgage aggregators and brokers. We support any recommendation that aims to protect customers and puts their interests first. Our objection to the recommendation as currently expressed is it applies only to aggregators owned by lenders. We support equal treatment.
We look forward to discussing these topics further today and we will also respond in greater detail to all recommendations and findings in our written submission. As I said, we are broadly supportive of the draft recommendations; subject to thoughtful consideration of how they will be implemented.
We look forward to working constructively with the Commission, the government and our regulators to address important design considerations and improve competition and help maintain the strength of the Australian financial system.