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Banking Royal Commission

The final report of the Banking Royal Commission resulted in the biggest increase in bank prices since the GFC. Given all the scathing criticism this may have been very confusing for many investors.

The market reaction suggests that investors saw the report as much less severe than they had feared. It was a case of the bark being much worse than the bite.

Most of the recommendations were already occurring or were just reinforcement of existing law and it seemed that the blame rested more with the regulators than the banks. The poor mortgage brokers were crucified. While there are good and bad mortgage brokers, the recommendations show a complete lack of understanding of the industry. The banks are happy to use mortgage brokers as they go out and find loans for the banks and the bank does not have to employ staff. They pay a commission and a trail because it costs the bank less, since the mortgage broker finds and looks after the loan. As long as the commissions are similar, there is no incentive to recommend one bank over another. Surveys suggest that if the customer had to pay the mortgage broker the vast majority (over 90%) would not be prepared to use them, so they would go out of business, unless they were affiliated with a bank. This would reduce competition in the banking system, something the Reserve Bank governor Phillip Low warned of when he gave a speech on Wednesday.

For banks, it seems like business as usual and we can see little that forces them to operate in a different manner, other than the expectation of more aggressive actions by regulators.

That being said banking is not an easy business at this time, Royal Commission or not and the banks have many issues to deal with given declining home prices and economic risks. In the same speech Phillip Lowe also opened the door to further interest rate cuts, acknowledging concerns about the impact on home prices and consumer spending.

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