The Australian Bankers' Association today lodged its submission to the Senate Economics Committee which is inquiring into competition in banking.

The ABA said the evidence shows there is competition in banking, including in key financial product markets which are relevant to households and small businesses.

It said the housing finance market continues to be a competitive sector, although the competitive dynamics have changed since the GFC with the decline in market share of the mortgage originators and smaller lenders. Based on Cannex product listings alone there are more than 100 institutions actively marketing home loans with over 500 products to choose from. Current interest rates are above long-term averages.

The market for small business finance has become more competitive through 2010 as banks and other suppliers seek to grow their business credit portfolios, ABA said. Concerns over inadequate supply of small business credit appear to have declined. Interest rates on small business loans are higher than long-term trends and interest rate margins are higher than for housing lending, broadly reflecting the greater credit risk associated with SME lending, including higher probability of default and loss given default, the higher capital charge imposed by regulations, and the higher cost to acquire and service. Banks have been actively advertising for small business customers and have been recruiting significantly more business bankers.

Heightened competition in the deposit market is a notable feature of retail banking since mid 2007, as intermediaries have sought to reduce exposure to wholesale markets. All retail banks, building societies and credit unions offer deposit products and current interest rates are well above long-term trends and margins are more favourable for depositors.

ABA chief executive Steven Münchenberg said: "Australian banking customers are able to access banking products and services at competitive prices from a number of different providers."

"We do believe, however, there are initiatives which should be put in place to further enhance competition in the marketplace, particularly to improve all lenders' access to funds, which may put downward pressure on interest rates."

"It's important that the initiatives are properly considered and carefully implemented because some of the populist regulatory ideas which have been discussed over the last few weeks would hurt the consumers that they aim to help."

The ABA's submission identifies a number of key points regarding the operation of the various markets within which Australia's banks participate.

The personal lending market is divided between two products - personal loans and credit cards. Personal lending overall has declined from 9 per cent of total lending in the year 2000 to 7 per cent today. Credit cards account for about one-third of total personal credit. There are 64 providers of credit cards that actively market over 300 card products. Interest rates are higher than for other lending products, reflecting the nature of the product, but there is a wide choice of products. Interest rates range from 0 per cent to 21.49 per cent.

Mr Münchenberg said: "While the data show healthy competition in the key financial product markets, there are medium-term challenges. The most significant is the relative funding costs of categories of lenders. The gap between the average cost of funds for the major banks and that of regional banks and other small lenders has widened since 2007."

"Any initiatives should focus on strengthening the funding base arrangements of all participants, rather than re-regulating the Australian banking industry, which would have adverse and unintended consequences for financial institutions, consumers and the efficiency of our markets."