Green Banking

So the Green's have introduced a bill into parliament intended to put the banks in their place. Or so you might have thought if you just heard the sound bites about forcing the banks to limit changes on home loan interest rates to changes in the Reserve Bank's cash rate. Careful listening actually shows that that idea has yet to be put to parliament.

So, what does the current bill do? Well, it does three things, and I'm not sure how well it achieves what it's intending to do.

Part one says that the Australian Prudential Regulation Authority (APRA) has to introduce a new regulation on banks requiring them to offer a bank account with a minimum set of features with no regular fees, and any fees for certain actions have to be submitted to APRA for approval before they can be applied. No guidelines on what APRA can approve are included other than that the fees should be based on the bank's actual costs. No fees can be charged for withdrawals from the banks own ATMs, and fees for using another banks ATMs should be limited to the actual costs.

The one feature that is required which isn't a default feature now is the ability to access funds using a credit facility. This means every account would have a visa debit like feature (I'm sure mastercard also does this), which I don't think is something everyone needs.

I think most banks already offer accounts like this to people who aren't regular working folks such as students and retirees and such, so the only major impact would be reduced ATM fees and a bunch of bank pamphlets needing reprinting.

Part two requires all banks to offer a fixed interest gap mortgage product. This might sound like a good idea, but given the way the law is written, I can't see it working the way people think it will. The bill says each bank must submit to and get approval from APRA for a formula for calculating the base rate which reflects their cost of borrowing funds, and details on how frequently they will update the base rate. So far so good, but already I can tell you that the banks will likely update the base rate more frequently than people think and it will be much more complicated than base rate = Reserve Bank rate + a bit. The other part of a fixed interest gap mortgage is the fixed interest gap. This is a constant forth length of the mortgage but is negotiated between the bank and the borrower when the loan is originated. No limit is placed on the size of the fixed interest gap so if the banks really want to kill it off a good combination of funky base rate formula plus a huge fixed interest gap will mean no one will actually get one of these.

Part three deals with mortgage exit fees. It requires the banks to submit to and get approval from APRA for a formula linking exit fees to the actual costs involved. Again no guidelines are given to APRA on what should be approved or not, so the only thing holding banks back from something like exit fee = 5 x costs is the requirement that this formula be explained in the marketing material for the mortgage, but I'm sure the banks will manage some obfuscation of what they actually charge.

So we have a requirement for banks to offer a product that they can make as undesirable as they want, another product that they already pretty much offer to a lot of people, and some rules requiring banks get approval of the fees they charge with no clear guidelines on what will be approved or not except for a vague suggestion it be related to the actual costs the banks incur. This could have been a much tougher bill, but that would be a lot tougher to get passed, and then the Greens would have to console themselves to another bill that went nowhere. With this the Greens get to say that they're tough on banks despite the fact that there's more bark than bite.