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FACT SHEET: COMPETITION

"Competition and competitive markets are at the heart of the Inquiry’s philosophy for the financial system. The Inquiry sees them as the primary means of supporting the system’s efficiency. (Financial System Inquiry Final Report, page xvi)

"Although the Inquiry considers competition is generally adequate, the high concentration and increasing vertical integration in some parts of the Australian financial system has the potential to limit the benefits of competition in the future and should be proactively monitored over time.

"The Inquiry’s approach to encouraging competition is to seek to remove impediments to its development." (Financial System Inquiry Final Report, page xvi)

Table 1: Competition recommendations Recommendation	Description	Page Reference
2	Narrow mortgage risk weight differences	60
10	Improving efficiency during accumulation	101
14	Collaboration to enable innovation	147
15	Digital identity	151
16	Clearer graduated payments regulation	161
17	Interchange fees and customer surcharging	168
18	Crowdfunding	177
19	Data access and use	181
20	Comprehensive credit reporting	190
27	Regulator accountability	239
30	Strengthening the focus on competition in the financial system	254
39	Technology neutrality	269
42	Managed investment scheme regulation	273

Source: Derived from Financial System Inquiry Final Report, page xvii

Competition in banking

"Australia’s current capital framework for authorised deposit-taking institutions (ADIs) includes two approaches to determining risk weights for the purpose of calculating capital ratios:

• Standardised approach: This is the default approach… a common set of risk weights that seek to reflect general risks of different broad asset classes…

• Internal ratings-based (IRB) approach: Accredited ADIs (IRB banks) use their own internal models to determine risk weights for credit exposures… To date, APRA has only accredited the four major banks and Macquarie Bank to use IRB models."(Financial System Inquiry Final Report, page 60)

"Since the IRB approach was introduced, the divergence in mortgage risk weights between the two approaches has widened… The gap between average IRB and standardised mortgage risk weights means IRB banks can use a much smaller portion of equity funding for mortgages than standardised banks… this translates into a funding cost advantage" (Financial System Inquiry Final Report, page 61)

"In the Inquiry’s view, the relative riskiness of mortgages between IRB and standardised banks does not justify one type of institution being required to hold twice as much capital for mortgages than another." (Financial System Inquiry Final Report, page 61)

The Inquiry has made the following recommendation:
"Raise the average internal ratings-based (IRB) mortgage risk weight to narrow the difference between average mortgage risk weights for authorised deposit-taking institutions using IRB risk weight models and those using standardised risk weights."

(Recommendation 2) (Financial System Inquiry Final Report, page 60)

The Inquiry has made the following recommendation:
"Review the state of competition in the sector every three years, improve reporting of how regulators balance competition against their core objectives… and include consideration of competition in the Australian Securities and Investments Commission’s mandate."

(Recommendation 30) (Financial System Inquiry Final Report, page 254)

The Inquiry has made the following recommendation:

"Review the costs and benefits of increasing access to and improving the use of data, taking into account community concerns about appropriate privacy protection."

(Recommendation 19) (Financial System Inquiry Final Report, page 181)

This recommendation seeks to:

• "Increase the focus on competition in the financial sector.

• "Deliver more explicit reporting about the competition implications of regulatory decisions.

• "Highlight areas where there may be opportunities to strengthen competition." (Financial System Inquiry Final Report, page 255)

"In the absence of change, there is a risk that regulators and policy makers will not place sufficient emphasis on competition when making decisions." (Financial System Inquiry Final Report, page 256)