For the sake of a page one yarn, the Australian Financial Review will promote any old bunch of rent seekers looking to raid the public purse.
An outsider looking at today’s story headed “Bank chiefs warn on funding gap” would wonder what exactly our banks don’t want. After all, they (the NAB, CBA, Westpac and the ANZ) control around 75% of total banking assets in Australia and 92% of all housing loans.
The AFR was quick to condemn the move by the Federal Government to tax share schemes for employees and executives, even though the amount of revenue involved was small in the scheme of the Federal budget: some $200 million over four years.
But it is quick to grab and endorse a much bigger grab for the public purse by the banks, led by Cameron Clyne of the NAB.
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The story is cloaked in all the right buzzwords of the financial crash and credit crunch such as “deposit base too low”, “threat to recovery”, “over-reliance on offshore money” and so on.
The banks warn they might have to rein in lending and curtail the recovery (they are not lending now, just for housing). All banking lending for business is falling as they refuse to lend to companies large and small and force many listed companies to raise funds (over $A40 billion) in the stockmarket.
What the story is is a subtle warm-up for a renewed demand by the banks (It will be run through the Australian Bankers Association, with help from the various CEOs and no doubt some “independent” research) that they need tax deductability for the interest they pay on deposits. That way deposits can be built up more quickly and our reliance on offshore funding reduced will go the spin. You read it first in today’s AFR.
That way the banks can quit the expensive competition they are now engaged in trying to lure and hold deposits from ordinary Australians and companies. They are being forced to offer 4%-5% to attract and hold the money and that is starting to hurt. ING Bank and Rabo are proving solid competitors with their online offers and attracting money whenever any of the big four drop rates.
The big four have been allowed to get even more concentrated by the CBA buying BankWest and control of Aussie Home Loans; and Westpac to takeover the good bits of RAMS and St George. despite this largesse they are all moaning privately about the cost of attracting and holding deposits.
Bank analysts in the broking houses have suddenly awoken to the issue of too few deposits compared to overseas borrowings and are now carrying figures showing which bank has the smallest holding of deposits. There’s a suggestion that its weak and its future could be threatened by a sudden rise in the cost of offshore funding.
Its an issue that has been around for years, but one analysts and the banks have blithely ignored. When the credit crunch broke, the banks found themselves flooded by deposits as investors and ordinary Australians pulled money out of shares, property and other investments and stuck it in the big four banks.
Now the banks are finding they have to offer more to keep that safe haven money, or they have to risk the ire of bank analysts (who are in it for a fee anyway) and fund managers in going offshore and raising money, even with a Government guarantee.
The key paragraph in the AFR story was buried towards the end:
“Mr Clyne agreed creating a large fixed interest market could alleviate the pressure on banks. Another option would be to change the tax treatment of bank deposits to bring them into line with superannuation.”
That would allow the banks to reduce the amount of money they are paying out in interest to depositors, at the expense of depositors’ income levels. The banks would then use the tax deduction to increase their marketing spend (all effectively subsidised by taxpayers), while fattening their interest margins.
Superannuation is also a long term investment for people: usually its all their working lives. Whatever benefits should accrue to the policy holder. For business it’s a deduction, just as interest is and wages.
Deposits in banks are something very different. They are short term and can be volatile.
Northern Rock bank in the UK was not only hurt by a cut off of its access to short term wholesale funding, but it was sunk by a run in person and online by depositors grabbing their money.
In fact the UK has had several runs since then and the US had runs the failed IndyMac bank and on the huge Washington Mutual before it collapsed. Bank deposits from ordinary people are no more ‘sticky’ than wholesale funds when there’s a loss of confidence.
But in Mr Clyne’s plea and the AFR tale story we saw no mention that by cutting the Federal Government’s tax income, the banks would be forcing the deficit higher, borrowing higher and forcing cuts in services elsewhere in Government.
Its ironic that the banks want this tax treatment ( it’s part of their behind the scenes pressure on the Henry Tax Review) on deposits at a time when some economists overseas are pointing out that tax deductability for business borrowing costs, especially financial groups, contributed to the credit crunch and recession because it allowed them to over leverage themselves to make more money.
Ending the tax deductibility of interest for business, or restricting it, would bring screams from the banks and business, but it would be one way for paying for the deductibility of deposits.
An article in the RBA’s June Bulletin today doesn’t give any support to the banks claims on deposits. And the AFR should have waited till the article was published for up to date figures.
“In aggregate, banks operating in Australia currently raise around 43 per cent of their funding from deposits. About 43 per cent of these deposits are sourced from households, 46 per cent from financial and non-financial corporates, and the remainder from governments and non-profit organisations.
“Just under half of banks’ funding comes from capital markets, with a little more funding raised offshore than domestically. About three-quarters of domestic capital market funding is short term, whereas most offshore capital market funding is long term. A further 4 per cent of banks’ funding comes from securitisation; the vast bulk of assets that are securitised are housing loans. Equity accounts for the remaining 7 per cent of banks’ funding, and mainly comprises ordinary equity and retained earnings.
“The composition of banks’ funding was fairly stable over the years leading up to the onset of the financial market turbulence in mid 2007. Since then, the share of securitisation has fallen as there has been virtually no issuance in asset-backed securities (ABS) markets, and the shares of deposits and long-term debt have risen as banks have looked to attract these more stable sources of funding to underpin their strong credit ratings.”
The RBA points out that the big banks’ deposits share has risen from 45% in June 2007, before the crisis started to 49% in April of this year and foreign liabilities are flat at 25%, which is hardly a threat from offshore. Foreign owned banks offshore liabilities have risen sharply to 41% in April, from 30% in June 2007.
So the claimed worry in the AFR story about the banks funding from volatile short term funding off shore, isn’t really the case. The RBA says the short term funding is predominantly domestic and the offshore money is long term and therefore a bit more stable than the onshore funding from the wholesale markets.
The RBA makes the point that the transmission of the 4.25% of cuts in the cash rate has been biggest in housing (for the obvious political reasons) and smallest in business, credit cards and car loans and leases. In effect the banks are cross subsidising their bigger cuts in home loans by forcing business, credit card holders and people taking out car loans and leases more for their funds.