In 2010, the Australian Government introduced the power for the Australian Securities and Investments Commission (ASIC) to regulate exit fees that banks were seeking to impose. An exit fee is a...

In 2010, the Australian Government introduced the power for the Australian Securities and Investments Commission (ASIC) to regulate exit fees that banks were seeking to impose. An exit fee is a payment that banks required customers to make in order to be allowed to transfer their home loan to another bank. The government gave ASIC the right to declare void any exit fee that did not relate to the costs actually incurred by a bank in closing a customer’s account. An article in The Age (Martin 2010) gave one example of exit fees that were being charged at the time: a Smart Saver variable-rate loan offered by Homeloans Ltd would cost $5178 to exit if $300 000 had been borrowed for 25 years, and the borrower sought to exit within three years of taking out the loan. a What are the switching costs that exist in the home loan market in Australia? b Explain how these switching costs might increase the market power of suppliers in those markets. c How would you expect this to affect the prices charged by those suppliers, and their profits?