The NAB spin machine was on overdrive last week as Australia’s second-largest bank announced a 0.12 percent increase in the interest rate for variable mortgages – outside any move by the Reserve Bank – the first time a bank has acted in such a manner in more than a decade. NAB’s basis for the increase was that it was responding to the increased cost of money as a result of the credit crunch.
The business commentators in the AFR couldn’t quite decide if the move was warranted, or an example of banks exercising their market power.
Anthony Hughes, writing Chanticleer in place of Alan Jury must have been well briefed by the bank’s spinners, noting on Friday that:
The surprise has been that the banks have not moved [to increase rates] sooner, given higher funding costs have been an issue since July last year. The reluctance of the banks to immediately recoup the costs attests to the fact that there really is competition in the Australian mortgage market.
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Hughes seemed to be taking an unusual degree of acceptance of the bank’s position. Fellow AFR columnist, Karen Maley, was more circumspect, claiming that instead of being victims of the credit crunch, the large Australian banks have been beneficiaries of the turmoil, noting that the four pillars’ share of home lending has increased from 60 percent to 66 percent since the sub-prime crisis hit last July. Maley also noted that:
The reason [for the increase in market share] is simple.
The non-banks are almost totally dependent on borrowing short term in wholesale money markets to fund their lending activities. When money market rates increased sharply as a result of the US sub-prime crisis, their cost of funding escalated.
In contrast, the Big Four banks have huge deposit bases, which on average provide half their funding requirements and which insulate them against the vicissitudes of money markets, in fact, financial market uncertainty has boosted this deposit base.
The NAB’s decision to raise rates (and the significant likelihood that fellow banks will follow suit in the weeks to come) proves the argument that the financial sector is a highly regulated oligopoly, which, courtesy of the credit crunch, now faces little, if any, competition in home lending.
The banks have already benefited from the credit turmoil, with deposits increasing from the “flight to safety” effect (which actually lowers the banks’ costs of borrowing). At the same time, pesky competitors like Liberty, RAMS and Bluestone (who had been chipping away at the big banks’ market shares over the past decade) now have incredible difficulties in obtaining funds at anywhere like their previous costs, making them completely uncompetitive. This was borne out by RAMS being snapped up by Westpac for a song after it was unable to refinance $6.17 billion in debt borrowed on the short-term commercial paper market.
NAB’s rate rise proves that there would be fewer easier jobs than being a bank executive. Creaming billions from consumers in what many claim resemble illegal penalty fees, increasing variable rates without worrying that your competitors will undercut you and being insulated from competition due to licensing requirements. If anything, Australia’s banking industry resembles a Russian-style oligarchy, rather than a virile free market.