The potential erosion of banks' core lending and borrowing business as consumers are enticed into non-banking alternatives is a good reason to allow Australian banks to merge, says Wallis committee member Ian Harper. The banks concede there is little growth in the lending market.
Competition is tight and low interest rates are cutting further into margins.
Australian banks have made big earnings gains by cutting costs, which has included closing branches. Professor Harper argued yesterday that banks needed to be able to merge to change their business. This would allow them to remain competitive with an increasing range of non-banking financial service companies that are drawing customers away. He said the shift away from banks had occurred because customers had more information and wanted access to their savings earlier, which meant they were prepared to increase risk. Banks were returning funds to their shareholders as they became overcapitalised, which explains the barnstorming run of banking sector shares despite the softer economic outlook.