CBA takes a tilt at job of federal banker
While state governments have outsourced their banking to commercial banks, the Reserve still transfers $215 billion a year on behalf of government agencies, mainly relating to social security payments, Medicare and tax refunds.
In a submission to the Reserve, CBA said it was "inappropriate" for a central bank to provide such commercial banking services, and it would raise its concerns with the Treasurer. CBA, government-owned before its privatisation in 1991, also argued that the Reserve enjoyed a position that was unfairly protected by legislation.
"Fundamentally, we do not believe that it is appropriate for a supervisor of financial and payments systems, and associated banking activities, to also be a competitor to more commercial institutions participating in this market," it said in a submission to the Reserve.
"Conflicts inherent herein are substantial and best avoided, in our view."
CBA argued economic reform had focused on promoting "market mechanisms", but this was undermined "when a potential competitor is starting from a position unfairly protected by legislation."
The comments were made in a submission in response to a Reserve proposal to loosen the rules on the credit card regime.
Only institutions supervised by the Australian Prudential Regulation Authority can issue and receive Visa and MasterCard credit and debit cards.
But, the RBA argues, these rules are preventing several institutions - including itself - using the credit card access regime.
The Reserve's role as a banker to the federal government has been the subject of long-running debate, with banks pushing for Canberra to follow the states in outsourcing transactional services to the private sector.
The Reserve must, by law, provide banking services to the Commonwealth where needed.
Federal government departments can choose to use private banks, but the Reserve still provides transactional services for welfare payments, tax refunds and payments to government staff. In 2011-12 there were 285 million such transactions, worth $215 billion.
The Commonwealth Bank submission said the question of the central bank's role as a provider of financial services was relevant to the Reserve's proposal to loosen credit card access rules, and it would raise it with the Treasurer "at an appropriate time".
The comments come as institutional bankers compete fiercely for government business, amid low demand for credit by big companies.
Frequently Asked Questions about this Article…
The Commonwealth Bank (CBA) told the Reserve Bank it is "inappropriate" for a central bank to provide commercial transactional banking services. CBA argued this creates conflicts of interest and said the Reserve is starting from a position unfairly protected by legislation, a point it plans to raise with the Treasurer.
The Reserve Bank still provides transactional services for welfare and social security payments, Medicare and tax refunds, and payments to government staff. In 2011–12 the Reserve handled about 285 million such transactions worth roughly $215 billion.
CBA says a supervisor of financial and payments systems should not also be a competitor to commercial institutions. It believes the Reserve’s legislated position gives it an unfair advantage that undermines market mechanisms and creates substantial inherent conflicts of interest.
CBA made its comments in response to an RBA proposal to loosen the credit card access regime. The RBA argues current rules prevent some institutions, including itself, from using the credit card access regime, while CBA says the broader question of the central bank’s role is relevant to that proposal.
Only institutions supervised by the Australian Prudential Regulation Authority (APRA) are allowed to issue and receive Visa and MasterCard credit and debit cards. That APRA supervision requirement is a central part of the existing credit card access rules discussed in the article.
If the federal government outsourced more transactional services to private banks, it could open significant opportunities for commercial banks to win government business. The article notes institutional bankers are already competing fiercely for government contracts amid weak demand for corporate credit.
Yes. CBA said it would raise its concerns about the Reserve Bank’s role and the related policy questions with the Treasurer "at an appropriate time," according to its submission to the Reserve.
Everyday investors should watch policy developments on the Reserve Bank’s role and any changes to credit card access rules, because they could affect competition for large transactional flows (about $215 billion a year) and influence revenue opportunities for banks like the Commonwealth Bank and its peers.
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