Too big to fail? How about too cosy to deserve taxpayers' money?
This election year, I would like to see banking competition finally addressed. Lending is too heavily concentrated in the hands of the four majors, which are ''too big to fail'' and underwritten by taxpayers.
In 2012, the International Monetary Fund arrived at two key conclusions: Australia has one of the most concentrated banking systems in the world, and the banking oligopoly is a raw deal for taxpayers.
''Australia's financial sector faces a unique set of risks,'' the IMF said. ''Its banking sector is concentrated, dominated by four large banks, and their broadly similar business models and reliance on offshore funding leave them exposed to common shocks and disruptions to funding markets.''
I've consistently questioned the idea that we are better off with four mega-banks that can never be allowed to fail than with a higher number of mid-sized banks. The majors are now among the world's 20 largest banks. This means Commonwealth Bank, with a market capitalisation of $100 billion, is bigger than McDonald's and American Express.
While bank funding costs have plummeted during the past six months, the majors did not fully pass on the RBA's past two rate cuts to borrowers.
If you had an online bank deposit or standard savings account, your rates were slashed by as much, if not more than, the RBA's cuts. That's called margin expansion.
The IMF found the majors benefit from implicit taxpayer insurance, whereby they can raise money more cheaply than smaller competitors because investors assume the government will be there to bail them out if they get into strife.
The majors should hold extra capital to lower the risk that taxpayer guarantees would be called upon, it said.
The global regulator of bank regulators, the Basel Committee, has one solution to increase competition. It recommends that banks hold more high-quality assets that can be pledged or sold in exchange for money during a funding crisis. These assets include government bonds and AAA-rated ''asset-backed'' bonds. Most asset-backed bonds are simply portfolios made of billions of dollars in home loans.
Smaller players such as Bank of Queensland sell asset-backed bonds to raise new money to compete with the majors.
The attraction is that the price of the bond is generally the same for everybody and depends primarily on the quality of the loans.
If all banks are allowed to hold these bonds as part of a liquid assets portfolio, demand and activity for them will increase. This will improve the cost and accessibility of this funding source.
I hope Australian regulators embrace these recommendations.
So far, however, they have championed the principle that banks should borrow directly from taxpayers when they need cash.
This strikes me as odd: taxpayer bailouts should be our last line of defence. It is also surprising because the assets that secure taxpayer loans are the same ones used in asset-backed bonds!
What do you think? Talk to me on Twitter at @markbouris
Mark Bouris is chairman of financial services group Yellow Brick Road.