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May 2, 2012

Why we're all complicit in the banks' gouging

Whinge all you want about the big banks failing to meet the RBA's rates cut, but chances are you're benefitting from their gouging, say Glenn Dyer and Bernard Keane.

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Angry that ANZ can record an interim profit of $2.97 billion while refusing to pass on the RBA’s rate cut? Annoyed that banks continue to exploit the lack of competition to belt consumers and business with higher interest rates and fees?

The problem is, we’re all hypocrites. The complaints have considerable justification, but most of us are silent, greedy accomplices in what the banks are doing.

At some stage in the financial cycle, most Australians benefit from strong, profitable banks, either as depositors or shareholders. And by swallowing some of the RBA rate cuts, the banks are merely trying to do the right thing by their owners. And who are the bank shareholders, and who are the biggest group of bank shareholders? Why, ordinary Australians via their superannuation funds (retail, industry, self-managed).

The banks underpin much of our super funds’ investment in shares. Even industry super funds, which typically have a wider spread of alternative and property investments, will have 5-6% of their entire holdings in the big four banks. Their big dividends are much loved by fund managers, investors, advisers and shareholders. They are rivers of gold which this year will be around $18 billion.

We also want to have it both ways on rates. If you want a full pass-through of rate cuts by the RBA, then you have to be prepared to accept lower profits and deposit rates. But they in turn mean the banks lift their borrowings in wholesale markets here and offshore, increasing their costs and exposing themselves to greater risks in the event of another financial crisis. Go to Spain, France, the UK or Ireland to find out what weak, financially crippled banks do for confidence, the economy and consumers. Consumers, business and others in those countries have real justifications to moan and groan about their banks.

There’s a problem though for all the banks (and for retirees and others with bank deposits), in that after yesterday’s rate cut, nearly all the term deposits on issue are now half a per cent or so too expensive, but that expense won’t improve for months for the banks until the deposits expire and get rolled over at lower rates. Just how much lower will be the problem. So the banks face more pressure on their margins, possibly until the end of 2012, especially if there’s another rate cut from the RBA. As the RBA has found, while the cost of funds has fallen, the fall in bank deposit rates has been much smaller, as intense competition for deposits forces the banks to keep offer rates (especially teaser rates) higher than they would have expected.

In fact it’s not the cost of wholesale funding here or offshore that’s the problem for the banks who want to maintain their profits, it’s the intense competition for local deposits. That in turn makes every depositor part of the problem for the banks. While Australians moan and groan about the behaviour of the banks (in many cases with justification), they blithely demand higher rates of interest on their bank deposits (especially term deposits), which in turn pushes up bank funding costs which in turn has seen them keep some of the rate cuts from the RBA (and add a bit more). Bank depositors are part of the bank’s funding cost pressures, but we won’t admit it.

Don’t expect any sympathy at the RBA for the banks. It’s of the view the banks have contributed to their problems, and hurt the wider economy by keeping part of the last couple of rate cuts (and a bit more) thereby damaging consumer sentiment. This is what RBA chief Glenn Stevens said in yesterday’s statement about the banks:

“As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall …

“In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.”

That is, the RBA knows the banks won’t pass on the full cut so it went for a larger cut. It’s as much a bit of bank bashing (shorn of the rhetoric from Wayne Swan and other critics) as we have seen from the central bank for some time. And if we get another rate cut next month or in July, then that will be aimed at bashing bank lending rates even lower to a level where they are seen by the RBA as stimulative for the economy, not constricting. The first bank to pass on the next rate cut full will be a sign that the RBA has succeeded in bring the banks back into line.

A few other points need to be made. The rate cut (and those to come) won’t help retailing. There’s too much capacity and the structural change underway is now unstoppable and will see more outlets close, employment fall and perhaps one or two big chains crunched badly. The RBA knows, via the latest household expenditure survey, that just over half of all mortgage holders are repaying their mortgages at a rate above the minimum needed. In other words, they are building up their equity. There is no reason to believe that they won’t change this after the 0.50% cut yesterday. It just increases their level of saving.

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50 thoughts on “Why we’re all complicit in the banks’ gouging

  1. Observation

    Banks hey. Boy are they hard pressed! No really I feel sorry for them. Through superannuation they are guaranteed cash investments flowing in. They can now dictate the interest rates despite record profits and what the RBA recommends, so much to the point the RBA reduces interest rates to accommodate the lesser drop the banks will give.

    If interest rates drop it becomes more viable for businesses to borrow to invest back into their companies, or for developers to invest, or for contractors to expand their caopabilities. Eventually the increase in cash flow helps all. The problem is all this investment in financial institutes where money is invested for money’s sake. And there it sits floating around apparently making more of itself. This money needs to be channeled back into real projects for the betterment of the social infrastructure of the country.

    The banks are virtually locking up our money and they have the power to turn the tap on or off. They have the power to say if you can borrow and how much cash deposit you will need to do so. And at the end of the day they will make these adjustments for their profit, not for any benefit of the country. After all when it suited them they were irresponsibly throwing money at the public.

    Yes I know we the public were frugal and spent, spent, spent and we have to take responsibility for that, however with the holier than thou stance of the banks and the way they now dictate terms, it seems to me they are beginning to have more control over our money than us or the government.

  2. Stephen Morgan

    The whole article is misleading. Given that that Australian banking sector operates using Fraction Reserve Banking ( http://en.wikipedia.org/wiki/Fractional_reserve_banking ) and our reserve ratio in Australia is 10%, the banks are generating interest on up to ten time the amount of deposits. They are ‘highly geared’ in business parlance. This is why the whole financial sector is so unstable and Global Financial Crises are inevitable. The resultant inflation is effectively a form of tax / theft levied on the ignorant / powerless. Given that creating money (through loans) is illegal (as fraud) but for the banking act 1959, the government has the power to compel the banks to do do anything by amending the act, even altering the reserve ratio. This includes forcing the banks to pass on full reserve rate cuts, crude instrument though it is.

    Whilst I am aware of the inherent consequences that would occur if this was were to be done without complimentary measures, it clearly demonstrates that the banking sector controls the Government, not the converse. By extension since the opposition has not addressed this issue either, it is clear that government in Australia is like the orchestra on the Titanic.

    Failure to reign in the bankers, and deal with the fundamental flaws of a fiat money system, will leave our country and our economy in a permanently unhealthy state, like a organism unable to shake its parasites.

    The solution to these issues are not complex or difficult to understand, they just require great courage and commitment. This is as much a moral as an economic issue. The vested interests are so entrenched and so powerful, that change will have to come from grassroots to make it a bipartisan issue.

    For more info Google : Fractional Reserve Banking, and discover the second biggest fraud ever foisted or committed on mankind.

    Warm Regards


  3. Stephen Morgan

    Dear JamesH

    You are correct REF: http://en.wikipedia.org/wiki/Reserve_requirement#Other_countries
    Thank you for pointing this out to me, Statutory Reserve Deposits were abolished in 1988 and
    replaced with 1% Non-callable Deposits. This allows even greater money multiplication (and therefore instability) that I had originally stated. Primary analysis at http://paulgrignon.netfirms.com/MoneyasDebt/Analysis_of_Banking.html or if you prefer from the Federal Reserve (US) itself http://en.wikisource.org/wiki/Modern_Money_Mechanics.

    With regard to being ‘totally wrong’ , whilst I had the reserve ratio wrong, Australia most certainly uses fractional reserve banking,


    The fact that 1% Non Callable deposits are required, by definition is an admission that you do not possess full reserves (and that your reserves are therefore fractional)

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