The Federal Government’s guarantee for Australian bank deposits and borrowings, especially offshore, has done its work. The banking sector here and globally has steadied.

The guarantee has protected the likes of Macquarie Bank from imploding (helped by the shorting ban) and made sure the big four banks were not dragged down like Citigroup, Royal Bank of Scotland, Bank of America and a host of other global names which staggered and were bailed out by their respective governments.

Our big four are collectively among the strongest in the world, along with Canada’s big five. The local competition has either collapsed, gone away or been taken over and the latest half year results from the NAB, ANZ, and this morning, Westpac confirm their growing, taxpayer-supported strength.

All three have been warning about bad debts and the prospect they will rise further as the economy worsens over the next year. That could be true, and given their track record of questionable lending to the likes of Allco, Babcock and Brown and ABC Learning, there are probably more dud loans still to go bad.

But the thing that should force the Government to start easing the guarantee is the disgraceful way our banks have been able to fatten their interest margins, while crying poor and increasing their share of deposits.

From 2% (200 basis points) in the March half last year, the ANZ’s net interest margin jumped to 2.22% in the March half year.

The NAB’s net margin rose 0.17% to 2.53% from 2.36% in the same period of 2008. In both cases those gains reversed the steady compression of margins from 2003 onwards as competition in home and personal lending heated up and big-business customers went to market directly, forcing down fees and rates.

And this morning Westpac revealed that its net interest margin rose by almost a quarter of a percentage point to 2.24%. It was up 24 basis basis points (0.24%) over the corresponding period.

Part of that rise came from its Treasury operations but 7 basis points was a direct result of the cost of lending passed onto its business and retail customers. It doesn’t sound much, but when you have tens of billions of dollars in loans, (some of which have come from the St George merger) every little bit becomes a very large bit of the bottom line.

And that’s the best reason why the three-year guarantee should be scrapped at June 30, or eased back to protect some parts of their businesses, but on a diminishing basis.

Despite what they might claim about the toughness of the international banking sector, lending costs have fallen. The Libor rate is now under 1% because there’s so much money sloshing around the UK, Europe and US economies. Borrowing costs locally are coming down with the spread between the 90-day bank bill rate and the cash rate down to its lowest level in more than a year (less than 0.22%).

But our banks have the fat to withstand this: they have already made sure shareholders are paying the price: The NAB and ANZ cut their interim dividends by around 25%, Westpac by 20%. Profits on any basis are strong (except for the ANZ because of its worsening exposure to a silly deal involving a monoline US credit insurer). But the ANZ is talking about expanding further in Asia, even while warning about more bad debts to come.

Westpac cash profit fell just 6%, the ANZ’s was down 40% or more and the Nab’s fell 9.4%.

Weak banks don’t talk like that, strong banks do, and if they go off and buy a bank in Asia, it has to be done without any help from the Government guarantee. The same applies to struggling Macquarie Bank. It should be whipped off the public teat straight away, despite its poor result and told to stand on its own with all the excess liquidity and capital it claims it has. That Macquarie is openly talking about or briefing the media on using the excess capital (the war chest), tells us a lot about the benefits of rent-seeking and gaming the taxpayer by Nicholas Moore and his board.

And finally, of the 4.25% (425 basis points) in rate cuts by the Reserve Bank since September, the Commonwealth has so far passed on 394 (3.94%) points and NAB 387. ANZ and Westpac have made 380 points (3.80%) of cuts. Some of the banks have started increasing their fixed interest loan rates to protect their already fattened interest margin. That’s greed.

So while the CBA has been rightly bagged for only passing on 0.10%, it’s been the most generous: while holier-than-thou Westpac and the struggling ANZ have been the greediest.

And if you happen to want a home loan from Westpac now and you don’t quite meet the Westpac criteria, they helpfully send you off to St George, and if you don’t make it there, off you go to Rams, the cheap as chips lender that Westpac bought (name and some of the business) in the first few months of the credit crunch in late 2007.)

The Commonwealth is already doing the same with Aussie Home Loans (33% owned) and Wizard, and very soon BankWest.

Come on Prime Minister and Treasurer, time for you to you to evict the Big Four banks from the taxpayer house. The time for the guarantee is over.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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