Rebuttal: Understanding the problem outlined by Proposition

Many things have to be clarified about the competitiveness of the banking sector. First, we never said that the banking sector is characterized by perfect competition (which is a purely theoretical concept and we cannot find ANY examples of it in real life). However, we contended that competition is present and it drives the behavior of banks. That competition is present is supported by what we can see around us. Generally interest rates that we observe are low; so are bid-ask spreads. Take a random country and you will find a lot of commercial banks operating in it. The banks promote themselves via various means, you find new bargains available to you, the range of products they offer is wide (various types of deposits, etc.). Of course this is not a perfect competition where every bank is a homogeneous entity, but it is impossible to have it anyway. We could argue to which extent the financial sector is competitive for ages. We could question a very strange document, referenced to us by proposition in their rebuttal to our first point, which rhetorically asks us: “Is it not possible to offer a qualitative banking service to all South Africans without any bank charges?”. We could give our own references about the competitiveness of the banking sector. It would take ages and neither side would prove anything, at best, we could agree on the extent to which a sector is competitive in each particular country in comparison with another country or another industry, because there is no such thing as an absolutely competitive industry. The important thing for the debate is that even if we accept the notion that banks are very uncompetitive entities, it is not clear why the cap of interest rates should be preferred over the regulation of margin, which is the standard practice of regulating industries with weak competitive forces, or some other regulatory measures. Ultimately, if you put a cap of 20% on private loans, probably some 98% of all loans are still unregulated and subject to monopolistic behavior since the bankers are so evil and can exploit you. This problem is gone once you start regulating the margins, which is a more sensible approach to the problem. The proposition seems to be convinced that pricing of high-risk personal loans is such a big rocket science that banks cannot possibly value them and they need to be prevented from doing that. Even if we accept the premise (banks are stupid), it remains a mystery why exactly loans for private customers should be capped. Their plan implicitly assumes that banks are smart enough to value loans for corporate clients (at any risk level) and low-risk loans for private clients. Why high-risk private loans are so different and what is so complicated about their assessment, we do not know. If they are different because they are given to poor people (which does not change the valuation part), proposition's plan does not help them in any way - it simply denies these people the opportunity to take the loans in the first place (as is proven in our first substantive point). To prove that banks are stupid, the proposition uses the current economic turmoil as an example. We certainly agree that banks are not omnipotent (nobody is) and they make mistakes. However, using the current crisis as an example is not the best idea ever. The main reason for the crisis was the widespread use of financial derivatives whose risk was difficult to assess. Since these derivatives were a new thing and they had complicated payoff schemes, banks and other financial institutions did not possess the adequate tools to value them and made mistakes. The point here is to understand that valuing a financial derivative whose value depends on another financial derivative which, in turn, is dependent on a mortgage pool that was valued poorly by a third party (a rating agency) is quite a dodgy thing, especially taking into account that you have not done this before. However, valuing a loan for a private customer when you have been doing this for ages is not such a big rocket science. If bankers cannot do this, they cannot do anything. If the proposition does not think that their plan would prevent another crisis, perhaps they could avoid statements like this: “We humbly propose to make one useful contribution towards increasing the chances of avoiding similar bank crises in future.” Now it seems that the proposition started the case with one idea (or no clear idea at all), but once it did not work out, they started to change the direction of the debate.