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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.

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 comments

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

  1. Suzanne Blake

    Swan can take credit for the rate cut. He and Gillards policy of crueling business and consumer confidence has led to this.

    Swan says that the interest rates are lower now that at any time that Howard was PM. He is right. We have had a GFC since then and we now have a Government who has blowed many many billions and we will take a generation to pay it back. Hopefully.

  2. ianjohnno1

    Yes, that is one downside of superannuation; many now find that greed is almost compulsory. More and more little capiltalists.
    Yes, I suppose I am one…

  3. David Allen

    Where does this, ‘lack of competition’, idea come from?

    In my small town of about 15,000 souls, apart from the big 4 alleged cartel, we have Suncorp, Bank of Qld, Bendigo and numerous building societies and credit unions.

    Competition for deposits is ferocious and generally led by internet only banks, most of whom appear to also offer home loans.

    Got me beat?

    Disclaimer. I have no connection whatsoever to any bank other than as a depositor and via superannuation.

  4. Wallace Scott

    Given the level of security (government backed) the big 4 banks enjoy it is not necessary for them to try keeping that margin profit which they gained since the GFC. They’ve only been passing rate cuts to mortgage holders without passing to business and that’s one of the main things that is hurting business and holding down the economy.

    Anyway, if they don’t pass rate in full then it keeps inflation low then there can be one further rate cut from the RBA which will help holding down the AUD from bolting towards $1.10USD and kill our industri,es. The dollar was resuming its upwards trend lucky we got 50 basis points cut to stall it. The 100 week average is reaching $1.01USD now it’s getting dangerous, too large volume of long positions have built up eventhough a drop of more than 20% of long positions occurred since the RBA indicated last month that it will cut rate pending inflation data, and it will be very hard for the dollar to go back below parity. Hopefully commoditi,es prices and China growth stay moderate and US accelerate growth that may help keeping our dollar staying between 95cents to 1.05 cents.

  5. Wallace Scott

    God, moderation again.what’s wrong with Crikey???

  6. Wallace Scott

    Given the level of security (government backed) the big 4 banks enjoy it is not necessary for them to try keeping that margin profit which they gained since the GFC. They’ve only been passing rate cuts to mortgage holders without passing to business and that’s one of the main things that is hurting business and holding down the economy.

    Anyway, if they don’t pass rate in full then it keeps inflation low then there can be one further rate cut from the RBA which will help holding down the AUD from bolting towards $1.10USD and kill our industr,i,es. The dollar was resuming its upwards trend lucky we got 50 basis points cut to stall it. The 100 week average is reaching $1.01USD now it’s getting dangerous, too large volume of long positions carry trades have built up eventhough a drop of more than 20% of long positions occurred since the RBA indicated last month that it will cut rate pending inflation data, and it will be very hard for the dollar to go back below parity. Hopefully commoditi,es prices and China growth stay moderate and US accelerate growth that may help keeping our dollar stay,ing between 95cents to 1.05 cents.

  7. Wallace Scott

    aaargfghhhhh

  8. Apollo

    Too true we’re all greedy hypocrites!

    Oh, SB is at it again. I remember she told Jimmy or someone that the Labor government spend too much and caused inflation and the Reserve Bank has keep interest high consequently hurting borrowers. Now she says that the rate cut and low interest is due to Labor’s overspending.

  9. carolinestorm@iinet.net.au

    I do use the banks to further my interests as much as possible. My ANZ savings accounts give monthly interest payments and offer a higher rate than ANZ term deposit accounts.

    I’m also aware that ANZ uses me to further their interests. Recently I deposited my US pension cheque from the Bank of America to be exchanged for Australian dollars. Four weeks later this was done and my account charged A$89.90 for the privilege [this did not include exchange rates…not only the miners are less than amused by the high A$!]. After speaking with various levels of ANZ staff for some time, I finally used the words I should have introduced earlier ‘banking ombudsman’. The full amount was refunded to my account in a few minutes.
    Always remember the magic words…’banking ombudsman’…or, of course any substitue ombudsman.

  10. Wallace Scott

    Still has not let my comment through? Banks have not been passing rate cuts to business that’s why business and the economy is hurt, they only passed to mortgage holders.

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