We are in a phony war with bank mortgage and interest rate cuts, which, if it was happening in a fortnight, would be on a par with the search for Big Foot, the Penrith Panther or the Nullarbor Nymph.
Yes, the big four — CBA, ANZ, Westpac and NAB — are sitting back and waiting for one of them to bolt from cover, so they others can get a lead on how much of the 0.25% rate cut to pass on. (Isn’t that price signalling? You can bet that the ACCC is watching closely.)
The tip is that the NAB will break cover some time today with a rate cut of about 0.15 to 0.20% (it only passed on 0.20% of the 0.25% November 1 cut, remember). The NAB has been lending more than the others and has led the move to eliminate some of its income streams by getting rid of some fees and charges, so its finances are said to be the weakest.
The cupidity of the big four banks on the issue of rate cuts and rises has already been exposed on two fronts: two smaller banks, Bank of Queensland and ME (Members Equity) have already passed the cut on in full, even though they do face higher costs for raising funds locally (being smaller and carrying lower credit ratings than the big four.
And, what the media conveniently forgets is that big four banks all have past form.
It’s not new news if they big four don’t pass on all the 0.25% cut. For example, in April 2009 during the global financial crisis — three eventually passed on only 0.10% of the 0.25%, while one passed on nothing.
And remember how the big four boosted their mortgage rates by more than the 0.25% rise in November 2010? How quickly we all forget. A reminder: the CBA and ANZ lifted mortgage rates by 45 and 39 basis points, respectively follwoing the Melbourne Cup day rate rise in 2010. The NAB lifted its standard variable mortgage rate by 0.43% and Westpac by 0.35%.
So we know all banks are bastards. It’s not a new story.
And there are a couple of other points to be made: the cuts won’t have all that great an impact on mortgage holders because, as Crikey pointed out last month, well over half of them repay more than they have to each month, thereby building up equity at an even faster rate than they were doing a year ago. The banks get their money back faster and people will own their houses a bit quicker and newer mortgage holders will find the pressure easing, if they cut their repayments. But most won’t.
And what about savers: they will get less for their term deposits as they rollover (that’s called “rollover risk” at the big end of the market) and will get lower rates on their transaction accounts. For people on fixed incomes, its another blow, and yet you don’t hear much about that and the media only covers mortgage holders (is that because many in the media have mortgages). The damage is greatest among older bank account holders and pensioners.
And you can bet that the banks will be quick to cut deposit rates, and slow to cut rates charged on credit cards and loans to business: all in the name of boosting what’s called their net interest margin and improving their bottom lines.
There’s a large element of churlishness and “let them eat cake” from the big four if you look at recent history.
One of the real achievements of the GFC so far as Australia is concerned, is that we managed to save our banks the ignominy of reporting big losses or worse. Sure Bank West (owned by a crippled UK bank) and St George, were allowed to be taken over by the CBA and Westpac respectively (which hasn’t done wonders for Westpac’s earnings since 2008-09), but a combination of timely Reserve Bank action, the federal government loan guarantees and the financial claims mechanism convinced customers not to do what their counterparts had done to Northern Rock in the UK or countless UK banks, and stage a confidence-sapping run that forces a government bailout.
The federal government (that’s us, the taxpayers), will earn more than $5 billion from the loan guarantee fee by the time this financial year is up and the Reserve Bank also made hundreds of millions of dollars from doing deals with the big banks in the final quarter of 2008 and early in 2009 to maintain liquidity levels in the financial system.
Despite that move, ordinary Australians and small and medium businesses (and no doubt some larger ones) quietly withdrew billions of dollars (over $10 billion by some estimates on top of normal needs) in the closing months of 2008 and early 2009. By June 30, 2009 the number of bank notes on issue was still up 14.3% from the year before, an indication of large the silent run had been. But that didn’t cripple the banks because confidence was maintained as much of that cash was returned to the banks as 2009 went on.
That confidence was supported and nurtured by the federal government and the Reserve Bank, in other words, taxpayers supported the banks and the financial system and saved a lot of loss and anguish for everyone concerned.Three years on the world is facing another crisis, this time in Europe. It is nowhere near as dangerous as the sudden near collapse in 2008 that was sparked by the failure of Lehman Brothers and the US subprime crisis crunching banks, businesses and economies around the world in the space of two months. But it is a growing concern.
Banks throughout Europe have badly hurt this time around, but in the US, Australia, the banks are OK, except for a rise in short-term funding costs, which is normal as investors worry about the safety of the banks they are lending money to.
One of the key indicators to watch is the amount of money held in Exchange Settlement Accounts at the Reserve Bank by banks and other financial groups eligible to do so. If the amount starts rising, its a sign the banks are starting to worry about the safety of the financial system and lending to their peers, so they start leaving as much as they can with the RBA in these special accounts where it is safe.
In the 2008-09 crisis it soared to well over $16 billion on one day (December 22, 2008) as the RBA allowed banks to do so (and then siphoned off much of that into special term deposits).
This time around, there’s been no change at all, the ESAs at the Reserve Bank have been at normal levels for months on end, there’s just no sign of nerves among our banks and financial groups, unlike Europe.
At the same time our banks are healthier than they were in late 2008, much of the dodgy debts have gone, poor loans have been written down or expensed and the banks have raised tens of billions of dollars in new capital to strengthen their balance sheets. That’s why last week’s one-notch downgrade for the big four by Standard & Poor’s to AA minus was a storm in a teacup.
A senior RBA official pointed out in a speech last month that the banks have cut back their exposure to offshore funding since 2007 and lifted their harvesting of domestic deposits: “In Australia, since mid-2007, deposits have grown at an annualised pace of 11%, compared with credit growth of 5%. As a result, while the level of wholesale issuance by Australian banks in 2011 is about the same as that in 2007, it is a significantly smaller share of total bank funding.”
That has reduced their exposure to Europe, but with the US market still open, its nowhere near the problem of three years ago this month. The big four have cut the amount of offshore funding in the past year because of the strong rise of domestic deposits as the Australian savings rate has steadied around 10% to 10.5%. That has helped the banks maintain their interest margins, even though they started offering relatively high interest rates on deposits.
Those are falling, thanks to the fall in market yields as investors have factored in RBA rate cuts and foreign buyers have plunged into Australian government bonds and state government securities, attracted by our AAA rating and secure and steady financial system. But listen to the banks in recent weeks and their lobbyists and they are facing higher levels of danger and costs.
Given what happened three years ago, that’s rubbish, but don’t think that the current stand-off is something new. It isn’t and we are going to see similar situations time and again.