Don’t you just love the banks? They just give and give and give. In fact, they are so generous that, according to a recent survey by The Australia Institute, more than half of Australians who do not have a job received unsolicited offers of credit cards last year. Offering money to people in their time of need, how good is that?
Of course, the interest rates on credit cards are a little higher than average. In fact, they are about three times the official interest rate. But that’s fair because, as we all know, the risk to the banks of people defaulting on credit cards is higher than average. But if the risks to the banks are so high, why are they writing to unemployed people and offering them credit?
If credit cards are so risky you would think the banks would be more careful about to whom they offer credit limit increases but in fact the opposite is the case. Banks love customers who are struggling to make the minimum monthly repayment as they end up paying the most in interest. They won’t admit it but they can’t stand all those customers who pay off their balance in full each month.
Another thing they don’t like to admit is that credit cards aren’t actually that risky. According to the Reserve Bank’s data, credit card customer defaults only account for 1% of the total money owed. And when you consider the billions the big banks make in credit card fees from customers, retailers and smaller institutions you can see why the banks are so keen to offer more and more credit cards with bigger and bigger credit limits to almost anyone they can find.
The generosity of the banks doesn’t end with offering us all those credit cards and frequent flyer points. On the contrary, in addition to helping us at a personal level they are there to help our economy as well. According to Ralph Norris, the chief executive of the Commonwealth Bank of Australia, the $6.1 billion profit he just reported was a boon for all Australians. Banks pay lots of wages you know, and they even pay tax. But, of course, the main thing they pay is dividends to their shareholders.
In an attempt to soften the expected community hostility to the 41% increase in his bank’s profit Norris trumpeted the fact that his bank paid their 45,000 staff more than $4.5 billion in wages but in making this comparison he actually highlights an amazing feature of the Australian banking system. Last year 45,000 people got up each morning and worked hard for the Commonwealth Bank and at the end of the year the shareholders of the bank who had done nothing more than wait patiently for the dividend cheques earned far more than them.
Of course banks need to make a profit if they are to stay in business, and of course those who have invested in banks deserve a dividend cheque. The question isn’t should banks be allowed to earn a profit, it is how much is enough?
Last year banks made actual profits of about $23 billion, which translates into more than $1000 in profit for every man, woman and child in the country. While the bank reporting season isn’t finished yet, it looks like this year it might be more like $1200 per person. Is that enough? The stock market didn’t seem to think so as the share price for the Commonwealth Bank actually fell the day it announced its 41% profit increase. They were expecting more.
There has been a lot of talk about the cost of living in this election campaign but there has been very little discussion of the need to regulate the banks to keep their fees and interest rate margins down. Every dollar they gouge in super profit is a dollar that comes straight out of the pockets of ordinary Australians.
In their desperation to look civic minded rather than rapaciously greedy the banks have started to concoct bizarre stories about how we all benefit from high bank profits. Really? Would we all benefit if higher petrol prices helped to keep the oil companies “strong”? Would we all benefit if higher food prices helped to keep Coles and Woolworths “strong”?
The plain fact is that the big banks in Australia are far too strong as it is. They have used their strength to drive out their smaller competitors. They have used their strength to charge outrageous, and possibly unlawful, fees on those who missed a payment. And they have used their strength to increase their profits to the point that the underlying profits of the banks account for about $3 out of every hundred dollars earned in Australia.
We don’t need stronger banks, we need stronger regulation. And if that doesn’t work we should have a super profits tax on the banks. I can just imagine the advertising scare campaign they would run: “A bank super profits tax will hurt Australian families. Just like we do with interest rates, we will pass all of the costs straight back on to consumers. You can’t hurt us. We’re just too strong”.
Dr Richard Denniss is executive director of The Australia Institute, a Canberra-based think tank
HEAR, HEAR!! You are absolutely right Dr Denniss!
I remember the days, not too long ago now where the bank actually paid me for the privilege of looking after my money – now I have to pay them! I’m embarrassed to tell the accountant every year how much interest I earned!
Also I’m one of those people who pays off their credit card bill every month that you speak of (if I’ve used it) – that’s the only way I can have my revenge!
At the end of the day I believe it comes down to the investors, they’ve got to realise their personal greed for higher dividends every year (got to be better than last year!) is having an escalating detrimental effect on society because the more they want, the more ruthless and unscrupulous the banks (and any publicly listed organisation for that matter) become to achieve the results. It’s a never ending vicious circle forcing added stress and cost onto those at the end of the line who can least afford it.
It’s unfortunate that on many levels, people want to live in a community but they don’t want to be a part of it!
“In fact, they are about three times the official interest rate. But that’s fair because, as we all know, the risk to the banks of people defaulting on credit cards is higher than average. But if the risks to the banks are so high, why are they writing to unemployed people and offering them credit?”
The banks don’t know these people are unemployed. They don’t have access to tax information.
And Credit Cards are riskier than other loans as they are not guaranteed by an asset such as a house or car.
Dr Denniss refers to super profits – exactly what the banks make courtesy of their licences and other Government-granted privileges. (witness the way they decimated their smaller competitors during the GFC – with the help of the Government’s differential Guarantee surcharge)
Is this a veiled criticism of the MRRT, or is it a call to extend it??
And while we are on the MRRT, (sorry for the segue) am I the only one to object to the Government determining key taxation policy via discussions with 3 multinational companies?? AND is there anyone out there who has assessed the potential for punitive action to be taken by the 21 counterparty/countries who signed up to bilateral investment treaties with Australia?
The last thing the Australian economy needs in relation to banks is to give politicians or bureaucrats the power to discriminate against the banks or to try and run them better (directly or by indirect controls). That is a sure way to sub-optimal results all round.
There are four major banks which are actually competitive in many ways (e.g. NAB recently abolished one range of fees, all of them engage in different ways to cut costs which, when successful allows them to compete for example by abolishing or lowering fees or offering a better mortgage interest deal etc.) and quite a number of alternative places to lodge one’s cash, provide credit or credit cards etc. To the extent that they make quasi-monopolistic extra profit beyond the cost of capital the greatest beneficiaries are Australian taxpayers and retired people including Australian taxpayers who are relieved of the need to support self-funded retirees.
What is Theresa talking about in suggesting that a “personal greed for higher dividends” is having some noxious effect? The dividends have to be higher simply to match inflation and a bit extra to match pension indexation to average wages. Most recently, they need to be higher to make up for the cuts following the GFC – or didn’t she notice that because it doesn’t concern her that self-funded retired people might be poorer? It could, just possibly, be true in some almost fanciful case, that an employee of an institutional investor benefits from a bank meeting his forecast of a higher dividend. Ah, but then it might be the other way round. He/she forecast no increase in dividend and recommended a Sell so loses his bonus because the bank increases its dividend and its share price goes up……
Julius,
The inflation rate for this year is approximately 3%. The Commonwealth bank increased its profit by 41%. Hardly ‘matching inflation’.
Your rhetoric about the banks being competitive and cutting costs doesn’t match up with the facts. The Commonwealth Bank had a $6.1 billion profit that set a new record for a bank profits. For your claim about competitiveness to be true the banks should be seeing less profits as they return more of their savings to their customers to attract a larger market share.
The only thing that deregulation of the banks has done has been to allow anti-competitive behaviour. How ironic that we need to reintroduce regulation to encourage competivieness. Still, it won’t be done under either our current corporate lapdog Coalition or scaredy cat visionless Labor governments.