This will bring relief to mortgage holders and businesses.
The Treasurer yesterday announced a raft of reforms that opens new avenues of funding for smaller lenders, cracks down on banks signalling their rate movements and bans mortgage exit fees.
He said the package would "build up competition in our banking system, which will ensure that interest rates are lower over time".
But his claim was challenged by the Australian Bankers' Association, which said banks would need to recover the costs of the new measures, possibly by imposing higher establishment fees or charging customers higher interest rates.
And the head of one of the smaller banks intended to benefit from the plans said the reforms would do the opposite of Mr Swan's intention to create a so-called fifth pillar in banking by boosting smaller banks and lending institutions.
Bank of Queensland chief executive David Liddy said the package was "disappointing", as it did not address the key concern for smaller lenders - the overall cost of funding. "I think this puts the cause for a fifth banking pillar back 15 years," Mr Liddy said.
The banks' warning on costs was echoed by opposition Treasury spokesman Joe Hockey. Responding to Mr Swan's assurance that his package would reduce rates over time, he said: "From all my experience, the banks will find another way to raise the money."
Mr Swan yesterday announced taxpayers would underwrite a $4 billion leg-up for building societies, credit unions and small regional lenders to help them become more competitive against the big four banks in the home-loan market.
He conceded there was "no silver bullet here" and the global financial crisis had brought serious challenges for Australia's financial system. "We can't solve all of these challenges overnight . . . we need to move decisively, but we also need to move carefully."
The reforms will outlaw home loan exit fees from next July and give the competition watchdog the power to pursue banks engaged in price signalling. This involves banks tipping each other off about their intentions on rate movements. The plans, part of a three-tiered reform package released by the Treasurer yesterday, follow heavy criticism of the big four banks last month for raising their mortgage rates by more than Reserve Bank rate increases.
The proposals, which come ahead of a Senate committee hearing into the banking industry in Sydney today, sparked immediate controversy, with the Australian Bankers' Association defending exit fees as fair and hinting banks could cover their losses by increasing establishment fees.
The Treasurer also faces parliamentary obstacles in winning support for his reforms, with the opposition criticising the ban on mortgage exit fees and independent senator Nick Xenophon demanding the prohibition be extended to existing loans, not just future lending.
Public concern about interest rates has dogged the Gillard government, with banks reporting multi-billion-dollar profits while increasing their margins on interest rates. Mr Hockey has campaigned on the issue to tap public concern.
The changes ban exit fees, require banks to publish fact sheets on their loans, and empower the Australian Competition & Consumer Commission to act on price signalling. A second plank would increase support for smaller lenders through a $4bn injection of public funds into the residential mortgage-backed securities market - an addition to $16bn already provided under the government's economic stimulus program - and the creation of bullet bonds.
Mr Swan has also asked former RBA head Bernie Fraser to examine a new set of reforms, including total portability of banking business.
"This package is all about helping the customers, helping households, and helping business so that we can build up competition in our banking system, which will ensure that interest rates are lower over time," Mr Swan said. "There's absolutely no justification for any bank to raise its interest rates above the increases in the cash rate announced by the Reserve Bank."
Mr Swan said the Reserve Bank had made clear that since mid-2009 major banks' overall funding costs had moved broadly in line with the cash rate and that banks had confirmed their net interest margins were at pre-crisis levels.
The moves would strengthen the position of small lenders to be able to "compete vigorously" with the big banks, he said.
Mr Swan said building societies and credit unions - more than 20 of which would be permitted to call themselves banks under the changes - were "just as safe" as big banks and that the government planned a public education program about its changes.
Mr Hockey said two major banks had already abolished their own exit fees and that, on price-signalling, Mr Swan was welcome to embrace legislation already proposed by the opposition.
"This is about political relief for the government, not mortgage relief for bank customers," Mr Hockey said. "It is about the government's political catch-up, rather than the systemic overview and reform so necessary to deliver more competition and to deliver a more secure and stable banking system into the future."
Mr Swan's plan to introduce price signalling restrictions is likely to be strongly resisted by the banks. National Australia Bank chief executive Cameron Clyne described a similar proposal from the Coalition earlier this year as "ludicrous", warning it could reduce the transparency of the nation's largest banks.
Australian Bankers' Association chief executive Steven Munchenberg agreed more could be done to enhance competition but said banning exit fees would hurt smaller lenders. "Smaller banks have less scope to recover those costs from across their businesses," he said.
An ANZ Bank spokesman condemned the lack of industry consultation so far.
"Good consultation processes lead to better policy, and we believe an opportunity has already been missed in consultation on the development of this package," he said. "We have already seen the difficulties a lack of consultation creates in the mining industry."
Additional reporting: Katherine Jimenez and Richard Gluyas
