Competition has worked well in the banking industry in Australia and it is a mistake to view the financial sector as ‘too big’, Rodney Maddock, adjunct professor in economics at Monash University, argued in a paper prepared for the Australian Centre for Financial Studies.

Maddock set out to provide a local perspective on research by the Bank of International Settlements, which, he said, “purports to show that financial sector growth correlates with economic growth up to a certain level but has a negative impact above that.

“Overall it is difficult to conclude that any increase in the size of the financial sector as a result of the rapid growth in household borrowing was the result of financial sector distortions,” he wrote in his paper.”Individuals made their own decisions to live with higher levels of debt and bid up asset prices.””Normally when the demand curve for a service shifts outwards, as has apparently happened in these three markets, we would not see supplier margins fall. In fact, they would normally rise at least for a period until entry chiseled away the excess profits.”

Surprisingly then, bank margins have fallen quite consistently, with net interest margins roughly halving since the 1990s and bank fees per asset funded also falling.”However since most countries have had a downward trend in net interest margins, technology and globalisation were probably the drivers rather than local factors (such as the rise of mortgage brokers).”And while Australian bank margins have fallen sharply over twenty years, the Bank of International Settlements suggests they are still (at 183 basis points) only in the middle globally. Maddock says “what does stand out is the efficiency of the banking system.”

Download the Conference Paper

This paper was presented in July 2013 at the 18th Melbourne Money and Finance Conference (MMFC), which explored the theme Financial Sector Evolution – Prospect and Determinants.

For more papers presented in the conference, please click here.