As widely expected, the CBA yesterday followed the lead of the NAB and ANZ in announcing that it was increasing variable mortgage rates by 0.10% to 8.67%. The previous day, the ANZ had shocked borrowers by announcing a 0.20% rise to 8.77%, drawing the ire of Treasurer Wayne Swan.

In late November, ANZ CEO Mike Smith publicly called for the removal of the “four pillars” policy, to allow the major banks to merge. Crikey criticised the claims, pointing out the rampant market power of the banks currently, a situation that would certainly not improve should the pillars reduce in number. The fact that three of the major banks have increased rates over consecutive days simply goes to show that there is little if any real competition between them. In a free market system, competitors would use a price advantage to gain a market share, but Australia’s cartel-like banking system has no such need.

Yesterday, Crikey reported the comments of blogger, One Salient Oversight, who noted that:

Of course the credit crunch caused by the Subprime meltdown is affecting Australian banks, but to question a private company for the way it handles its money is appealing only to uninformed populists or ideological communists. If the ANZ is doing the nasty, then let people go right ahead and use other banks and financial institutions instead. That’s how a market economy works.

The problem with that statement is that changing banks isn’t like changing hairdressers. You don’t simply walk into a branch and tell them you want to switch your home loan from ANZ to St George. Crikey contacted a leading mortgage broker who noted that there are numerous pitfalls which customers face should they wish to change mortgage providers. Primarily, it’s the significant financial cost, which includes:

  • Most banks charge an “exit” fee of $700.00;
  • Banks will also charge around $300.00 to release the title to the property which they have in their possession;
  • There are government charges of approximately $100.00; and
  • Most banks charge around $600.00 as an “application fee” for a new loan.

In addition to the significant costs of around $1,700.00, in many cases the customer’s current bank will be loathe to release the title to the new lender, often intentionally frustrating the process. Mortgage brokers advised Crikey that it actually takes longer to refinance a loan than to source the finance originally. In some cases, borrowers had to wait for more than four months for one of the large banks to process the necessary paperwork. It has also been alleged that the major banks have in some instances, “intentionally lost” paperwork in their system to further frustrate the process. “Go right ahead and use other banks” may be nice in theory, but the reality is very different.

The banking industry is certainly not an example of a thriving sector of a free market economy. Rather, it is a highly regulated oligopoly, populated by massive institutions who possess incredible market power and preside over a largely unsophisticated customer base who are significantly penalised should they wish to switch to a competitor.

Rest assured, Adam Smith certainly didn’t have the Australian banking sector in mind when he penned The Wealth of Nations.