The decision by the Big Four banks to raise their mortgage rates in excess of the RBA’s “official” increase in November has led to a new round of industry reforms. Before the Treasurer’s policies were released over the weekend, many in the banking world feared that the vengeful hand of big government might fall upon them. Yesterday’s sharemarket reaction proves there’s nothing for the Big Four to fear. Here’s why.

First, the abolition of mortgage exit fees from mid-2011 will hurt smaller lenders far more than it will the larger ones. This is because credit unions and the like have far fewer avenues than the Big Four to recover the costs of customers who break their mortgages early. Remember that no other bank fees have been abolished or controlled like exit ones have.

Second, very little has been done to increase the pool of money available to expand smaller institutions’ lending books. Since the global financial crisis, the residential mortgage back securities (RMBS) market has remained a shadow of its former self, thus removing the source of cheap money that helped entrepreneurs such as John Symonds build Aussie Home Loans in the 1990s and early 2000s. This lack of funding means that it’d be virtually impossible today to start a similar business from scratch.

Other funding sources that might increase the volume of credit available to smaller lenders include:

  1. Superannuation funds — yes they’re assets will soon top $1trillion, but as yet they’re not willing to lend large sums without making a substantial return. Such desired returns at the wholesale level are unlikely to lead to cheaper retail loans; and
  2. Taxpayer funds — it is a truism in politics that most voters would agree that were the government to make cheap money available to all, that would be a very good thing. Fortunately, Wayne Swan has resisted the siren-like call of opinion polls to risk tax revenues in such a manner. The failures in the US of government-backed lending behemoths Fannie May and Freddie Mac attest to the folly of allowing taxpayers to fund home purchases.

So it’s unlikely that the announced reforms will increase the volume of consumer credit in circulation, and by a bit of old demand-and-supply analysis, the price of credit will also remain unchanged.

There were, of course, a couple of minor positives in what the Treasurer had to say. The ‘Government Guaranteed’ sticker that second tier lenders such as credit unions will be able to display outside their shopfronts could work to attract a greater share of the nation’s deposit pool, although any such increase will probably come at the expense of the major banks. And the possibility that, like mobile phone numbers, loan account details could become portable between lenders could make mortgage switching a less arduous task.

Overall, however, reform is far too strong a term for the banking package announced by the Treasurer. Instead, the changes could best be described as “minor but deliverable promises”, which, after the pink batts scheme and wasteful BER probably, isn’t a bad thing.