Unmasking the non-bank lenders

AS SHARES in the Commonwealth Bank hover close to record levels, lifting the country's biggest provider of home loans towards a market valuation of $100 billion, it is worth considering how the banking industry in this country has changed since the dark days of financial calamity in 2008 and 2009. Those were rollercoaster years of investor anxiety as the unsound lending practices of some of the world's biggest financial institutions were laid bare, toppling some and forcing others into mergers with stronger partners.

Some Australian banks spied investment opportunities amid all the uncertainty and, as they mopped up smaller lenders, the local industry began a period of significant consolidation. Bank investors may be winners but what about the consumers?

In 2008, Westpac bought RAMS Home Loans and St George Bank (including Bank of Melbourne). CBA paid $2.1 billion for Bankwest in October 2008, just two months after it bought 33 per cent of mortgage provider Aussie Home Loans. And in December 2008 Aussie Home Loans bought its rival, Wizard Home Loans. It is worth noting that CBA's share price has more than doubled since mid-2009. Now CBA has agreed to lift its stake in Aussie Home Loans to 80 per cent, and it has an option to move to 100 per cent later. The deal, which requires clearance from the competition regulator, already has raised some concerns about the real level of competition in the local market.

Bankmecu is one rival calling for greater transparency for consumers. It wants bank-owned mortgage providers that operate under non-bank brand names to disclose their ultimate ownership in all advertising - a move Bankmecu must hope will help it win customers disaffected by CBA, Westpac, National Australia Bank and ANZ.

A vigorously competitive financial industry, prudently managed and firmly regulated, is vital to Australia's interests. A lender that can rely on the financial backing of a strong bank is to be welcomed, but genuine industry competition only flourishes if these lenders operate at arm's length from parent banks.

The major banks' repeated reluctance to pass on Reserve Bank interest rate changes in full, coupled with the inevitable delays in implementing such changes, only enhances scepticism about banks' integrity and industry competition. If smaller lenders become mere puppets of parent banks, offering the same rates and fees on loans, then consumers will be worse off and so will this economy.