What if not all banks follow Westpac’s lead?

Not-so-fast Speedy Gonzalez. Just because Westpac have hiked interest rates, it does not mean that all the other banks will do so.

In fact, Westpac’s decision to increase rates by 0.2 per cent could well be a trigger for further competition in home loans.

Westpac cited recent regulatory changes to explain why they are putting rates up. Under these changes the Big Four banks, plus Macquarie, must hold more capital in reserve as contingency for any future bad debts.  Because these banks have to hold the capital in reserve, they cannot make any income from it – thereby reducing profitability; hence the rate rise.

The media have been running around claiming that all the banks will now be raising rates. Given that they are facing the same regulatory pressures, I would not be surprised if all the Big Four plus Macquarie do raise rates.

However, it is entirely possible that the smaller lenders will keep their rates low – thereby challenging the majors.

The logic for this is simple. These recent regulatory changes only force the Big Four and Macquarie to hold the same capital as the mid-tier lenders.  Lenders such as Suncorp, BoQ, Adelaide Bank have all been operating in this regulatory environment for a while and have not needed to increase rates.

Typically these lenders go through brokers – who are tasked to shop around to get the client the best deal.

Ironically, on the same day that Westpac announced the rate rise, Suncorp dropped rates and offered new clients $1,500.

Could it be that Westpac have shot themselves in the foot if it allows the smaller lenders to take away market share?