So are the big banks gouging, rapacious predators or not? What was until recently an RBA (and Treasury)-sanctioned consensus that the banking cartel had no justification lifting interest rates above the RBA’s own cash rate hike has been muddied by the RBA’s own views in the minutes from its November 2 board meeting. In contrast to the clear statement in the October board meeting minutes about borrowing costs, the November minutes note that while some banks had had a small reduction in net interest margins and others a small increase, and competition for deposits had “levelled off”, bank borrowing costs were “slowly” rising and that rates might rise by more than the cash rate.
This, some commentators insist, is evidence that Joe Hockey has been barking up the wrong tree on borrowing costs and the government’s attacks on the banks have been unwarranted. If the RBA expected that banks might increase rates by more than the RBA did, apparently that meant it approved of them doing so. The Australian has been particularly diligent in peddling this line. Sydney University’s Elvis Jarnecic has done an elegant demolition job on such claims in what is, word for word, one of the best takedowns of media disinformation in recent years. As Jarnecic notes, it doesn’t much matter whether bank borrowing costs are “slowly” increasing if the banking cartel has been more than recovering those cost increases — which it has been.
The case against the banks received further reinforcement — as if it needed it — over the weekend when Christopher Joye spotted an alarming trend in post-GFC RBA lending data in relation to small business lending secured by residential property. Before the GFC — over an extended period, 11 years — interest rates for SME loans secured with residential property had been only marginally above regular residential mortgage rates — as logic would suggest they should be. But since the GFC, the spread between the former and the latter has blown out to over 1%, and at one stage was up to 1.5%.
The political dimension to this is that it’s much easier for banks to gouge small businesses than households via residential mortgages. The media and politicians — as we’ve seen repeatedly in recent weeks — are fixated on residential mortgage rates, and not small businesses. As Joye notes, it’s possible there’s an element of cross-subsidy going on between residential mortgages and business lending.
The economic dimension, of course, is that higher loan costs for small and medium business have impacts on the viability, growth prospects and employment generation capacity of those businesses. All of which is why the focus on residential mortgage rates serves to detract from the substance of the debate over banking competition, or the lack thereof.
Wayne Swan’s focus has been on talking up a “fifth pillar” of credit unions and building societies. Compared to the big banks, the mutual sector is more plinth than pillar, and it’s a shame Swan’s concern for competition wasn’t manifest when he and the ACCC waved through Westpac’s 2008 takeover of St George in a decision that, even during the depths of the GFC, was criticised for its impact on competition. The government’s pricing of its wholesale funding guarantee hasn’t helped, either, with mid-tier banks like Bendigo Bank forced to pay a fee 80 basis points higher than that paid by the Big Four to access the guarantee, despite the much smaller systemic risk presented by the mid-tier institutions.
In short, when it comes to competition for the banking cartel, our recent policy settings have been anything but encouraging.
Still, Swan’s way on competition makes more sense than his cryptic claim that the government had “we’ve already had a fundamental review of the banking system”. If “we” means the federal government is a non-partisan sense, and “already” covers the 1990s, then he’s correct. And, yes, the rolling implementation of international financial stability reforms is a priority, but quite why that prevents a Wallis/Campbell style inquiry into not just competition but systemic issues around governments guarantees and moral hazard remains one of the mysteries of current politics.
As for Joe Hockey, he keeps getting leaked against, but he has the public on side. Perhaps that’s what annoys his incontinent shadow cabinet colleague.
Just think, we gzve out banks not one zac during the crisis in the world, not one folded up and sent investors and others broke and all those small buisnesses and others had a field day while the rates were low.
What the hell is wrong with the maxim that if you can’t afford it don’t have it?
I do get tired of all this whining from mortgage holders and small businesses who borrow from other people and can’t be bothered paying back what they promised they would.
After all they didn’t have guns at their heads to do it.
I know, we could nationalise all the banks, that would help competition. Except wait. The national rate is set by one national bank – 400 banks in the country would not make one jot of difference to that. And let’s get real, the banks are rarely more than 0.25% higher than the central cash rates anyway.
Do you want the banks to do what they did in Howards’ day and set their rates below the central cash rate and cause massive stagflation?
The Australian Government effectively gave their AAA credit rating to the Bank oligarchy during the GFC. And didn’t the banks spend up big. Comm Bank aquired Bank West, Westpac acquired St George. Etc etc etc.
The Australian government effectively gave the Banks its unlimited black corporate AMEX and said ‘Go shop’.
Having an unlimited line of credit is definitely not my defintion of ‘not one zac’.
The AAA rated Amex was a bad idea. I am not sure what was more absurd a) seeking a AAA rating from agencies which rated Lehman brothers AAA a short time before it became insolvent or b) giving a corporation unlimited government insurannce for its losses and expecting it not to capitalise on that. Its not a situation of moral hazard, its one of certainty of amoral behaviour.
Marilyn – I think you know there is so much wrong with what you have said there I don’t know why you do it.
1) While the banks didn’t get any money they did get their deposits guaranteed which is the next best thing.
2) It’s not a matter of not being bothered to pay back the debt it is a matter of being able to, and more importantly whether the banks should be allowed to continue to psot record profits while sending their customers to the wall by raising rate above what the reserve bank has.
3) The national Cash rate is set by the reserve bank, this is not the rate at which people borrow which varies from institution to institution and those like credit unions who aren’t designed to make a profit offer significantly lower rates but simply aren’t big enough to take on the big boys, and when they get big the banks simply take them over.
4) the reserve bank cash rate is currently 4.75%, my credit unions variable rate is 6.8% the big banks are more like 7.8%, during the GFC they didn’t pass on about 0.35% of the fall and have now gone above the reserve bank twice to add about another 0.35%.
As I have said a number of times on this website genuine competition is the answer but the individual needs to take some initiaitive.
Oh and Marilyn – More competition might just help raise the ridiculously low savings rates the banks pay so that even the wealthy retirees like yourself can benefit.