Mortgage whingers turn on banks

At the AFR:

The big four banks last week blamed falling profits from ultra-low interest rates for their decision to not pass on all of the Reserve Bank of Australia’s quarter-percentage-point cash rate cut to home loan customers. The central bank cut the cash rate to a record low 0.75 per cent last week.

But profit margins could fall even further if banks are forced to offer existing customers as good a deal on their mortgage rates as the deeply discounted rates being used to entice new business, which are typically around half of a percentage point lower, analysts warn.

Australian Competition and Consumer Commission (ACCC) chairman Rod Sims said the gap suggested the banks were disrespecting their “loyal customers” and that the longer that a customer stayed with a bank “the more out of kilter it seems to become”.

And via The Australian:

The big four banks are reaping an extra $14bn a year in interest ­repayments after withholding a quarter of all Reserve Bank rate cuts since 2011 while at the same time reducing term deposit interest rates in excess of official cash rate reductions.

An analysis of standard variable rates for mortgages and interest rates paid to savers, carried out by comparison website RateCity on behalf of The Australian shows standard variable rates have fallen by just 2.99 per cent since October 2011. Over the same period, the RBA has reduced the cash rate by 4 per cent.

The big four banks’ margin on average standard variable home loans has grown to 4.05 per cent over the cash rate, wider than the 3 per cent difference when the RBA began its latest round of monetary easing in 2011.

The margin is now double the 2 per cent margin that existed ­before the global financial crisis.

The RateCity analysis found three-year term deposit rates had been slashed by 4.3 per cent, compared with the 4 per cent reduction in the cash rate.

This is partial analysis at best. A few chart tell the tale. The Aussie property bubble was built with cheap foreign capital that disappeared after the GFC. To be sustained, the banks needed to lift their portion of more expensive deposit-funding so they did and still are:

They have also had to de-risk capital ratios that were far too low (and still are):

All these things had to be paid for somehow. It could have been done by shrinking the balance sheet and letting assets prices wash out (probably should have been even). But that’s not exactly going to please anyone is it, especially those doing the whinging today. So, instead it’s been done by holding back rate cuts to support net interest margins. Even so, NIMs have declined as interest rates fall to zero:

The issue now is that there’s no more interest rates to hold back, except a few pennies when the RBA drives down non-deposit funding costs with QE, and now we have this scab grab at the zero bound as the system runs out of room to support itself.

Labor is grandstanding, via The Guardian:

Labor says the Morrison government should consider increasing the bank levy in response to the failure by the big players to cut interest rates in line with the central bank, and look at broader measures to boost competition in the sector.

The shadow treasurer, Jim Chalmers, told Sky News on Sunday the government needed to sign off on a new inquiry into competition in the banking sector by the Australian Competition and Consumer Commission, and consider all options, including hiking the bank levy, after the major banks declined to pass through the full rate reduction following the Reserve Bank’s latest cut to the official cash rate.

The RBA last week cut the official cash rate by 0.25% and it now stands at a new record low of 0.75%. The latest cut was the third reduction in the cash rate in five months. Late last week, Scott Morrison accused the retail banks of “basically profiteering” and declared: “Banks, they never learn.”

Chalmers said there was a problem. “We need to have a broad conversation about how we make the banking system more competitive,” he said on Sunday.

“We do want our financial system to be as competitive as possible. We do want to see those rate cuts passed through so that they can do good, not just in household budgets but in the shops and businesses and in the broader economy as well. We should be up for that conversation.”

While he nominated a new ACCC probe and a potential hike in the bank levy as options, he said Labor would not support legislation requiring the banks to pass through the full value of the RBA’s reduction. “That’s not a proposal that we’ve picked up and run with,” Chalmers said.

Which would simply lead to the banks passing on even less rate cut, or even hiking out of cycle.

So, are the banks gouging? Yes, to the extent that they support and distort national interest policy in favour of the mass immigration/mass mortgage/mass consumption economic model.

But within that system, no, they are not. Without rentier profits they can’t lend at the scale needed to support the asset price rises at the heart of the system.

In short, all of those within that system that are attacking the banks for protecting margins are hypocrites.

David Llewellyn-Smith
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