Saturday, August 16, 2008

Hypocrisy as our banks slash rates... on deposits

As today's Daily Telegraph reports:

"ANZ has cut its savings rates by up to 0.55 per cent per cent, Commonwealth Bank by up to 0.40 per cent, St George by 0.28 per cent and Westpac by up to 0.30 per cent."

All in response to the dive in 90-day bank bill rates.

Fair enough. But those banks haven't yet cut their rates on mortgages (funded half at around the 90-day bank bill rate) and they say they are not sure they will at all.

And there's something else.

On Wednesday St George pushed UP by 0.25 percentage points the rate it changes on its business loans.


Curious, I asked the St George spokesman why the bank felt to the neeed to push up rates at a time when rates were falling.

She replied:


I can confirm we raised business lending rates 0.25% on Wednesday. Attached is the new rates now effective.

The following can be attributed to a St.George Spokesman:

Our rates are constantly under review. There are many other variables besides the official cash rate that affect interest rate costs and these all have to be taken into account. For example, the 90-day cash rate, the cost of short and long term funding, all impact the Bank's cost of funds.

The 90-day rate! Strewth! Don't they think we know it's been diving?

They must know. They cut their deposit rates in response.

In case they don't know, here is a graph showing what's happened to the 90-day rate over the last few days. It's gone of a cliff:

Where did I get the graph? Oh yes - St George in its Tuesday market presentation.


WT said...


Anonymous said...

If those banks don't pass on in full the interest rates cuts that will be made by the reserve bank, then they will be taking people for a ride.


Kevin said...

The banks do what anyone else would do in their position. They have been given the privilege through fractional reserve banking of being allowed to create money rather than having to have deposits which they then loan. That is, they create a loan which is then deposited.

They make money if their loans are repaid and from the difference in loan rates and deposit rates of interest. The risk however is compounded because if we have inflation then they have to increase the interest rate to account for inflation.

Fundamentally these monetary crises occur because money is created against incorrectly valued assets and then everyone scrambles to make sure they are not caught up in the fallout that occurs when the assets are revalued but the money that was created against the assets does not get revalued because we do not keep track of it. The solution - which was not available until the internet, modern computing, and communications appeared is to conceptually make each dollar created for a loan against an asset to retain its link to the asset. When the asset falls in value so the money created against the asset also falls in value. Once upon a time it was not possible but today it is. Of course the implementation will be done by making money fungible against an asset class rather than a particular asset but the principle remains.

So do not blame the banks. They will continue to increase the interest spread and they will continue to protect themselves from bad loans because that is what the system demands.

We could get true competition if we allowed anyone to create loans which would be possible if the money created from the loan was tracked and devalued when the asset against which it was created dropped in value.

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