And we do, see below
Australia’s big banks have a friend in Reserve Bank governor Glenn Stevens.
Appearing before the parliament’s economics committee Mr Stevens defended their rights to not fully pass on cuts in the Reserve Bank cash rate and to add on rate rises of their own.
“I do not think there is any question that relative to the cash rate the costs of some term funding in wholesale markets has risen, there is no doubt,” he told the Sydney hearing. “If your costs increase then you want to recover that in the price of your product - any business does.”
Lending rates were “roughly” where they should be even after the unilateral increases imposed by the big banks in February. The Reserve had expected some slippage when it cut rates in December. The governor had been “a little surprised” it had been fully passed on.
“We are still making the calls as to where monetary policy ought to be - there is just a small bit of slippage in part of the transmission mechanism,” he told the committee... “I do not think that is going to really, from our point of view, going to cause us a huge headache at this stage.”
Asked whether Australian banks were making unusually large profits by the standards of other Australian companies and banks overseas Mr Stevens said if he “had to choose between unprofitable ones and profitable ones I would chose the latter.”
“Are they too profitable? Our assessment is that, if you look at the rates of return on equity in our banks over a lengthy period of time - say 20 years - they are good, but they are actually broadly in line with the listed company sector in general in Australia.”
Australian businesses more broadly were either doing very well or very badly.
“There are probably very few sectors who themselves are experiencing average performance,” Mr Stevens said. “Some are quite clearly weak relative to the historical average while others are much stronger. We are acutely conscious history may offer limited guidance in assessing the net impact.”
The Bank had not intervened to bring down the high Australian dollar and did not plan to.
“I am not saying we would never do it, but we have not done so to date,” the governor said. “We do continue to ask ourselves whether what is happening in the currency makes sense. I would observe that the most recent bout of strength is happening at a time when the terms of trade have actually peaked and have started to come down. That is a bit odd, but we will see what happens.”
The “palpable fear” before Christmas that Europe was on the brink had lessened over summer.
“The anxiety has not gone away altogether, but the worst has not happened. Financial markets, while hardly brimming with confidence, have recovered somewhat over the past couple of months,” Mr Stevens said.
In today's Canberra Times, Sydney Morning Herald and Age
From Christopher Joye:
RBA Governor "volunteers" estimate of taxpayer subsidy of banking system
This is just the annual subsidy associated with the retail deposit guarantee.
(You need to multiply several basis points by just under one trillion dollars. If you take, say, 5 basis points, and you multiply by $1 trillion, you get $500 million per annum.)
It does not reflect the fiscal subsidy provided through the RBA's liquidity facilities, which are many and varied, the too-big-to-fail credit rating upgrade the major banks recently received, or the benefit of the Commonwealth's willingness to explicitly guarantee wholesale debts (or funding) during crises. But here is an interesting Q and A...
"Mr BUCHHOLZ: I am fine with profitability, but it is hard to argue that it is okay for us to be about profitability and at the other end of the spectrum try to create the argument of, 'Boo hoo, we're doing it tough; we have to move on a different trajectory of monetary policy.' How does the government bank guarantee work? I probably did not even say that correctly, but how does that guarantee work?
Mr Stevens: There is a guarantee for deposits in effect. Nobody remarked on the fact that the cap was wound back from $1 million to $250,000 only a couple of weeks ago. That passed without comment or drama, which is good.
Mr BUCHHOLZ: There were probably other things on some of the political leaders' minds.
Mr Stevens: There appears to be other news around, yes. As to how it works, it is technically called a financial claims scheme. Should a bank fail, you would get your money very quickly up to that capped amount. The $250,000 covers almost all people, at an individual level. In effect it functions a bit like a guarantee. At a technical level, without going into too much detail, if some institution is put into administration by APRA then the financial claims scheme would come into operation. The banks assets would be recovered in the wind-up to pay out the creditors, but in the interim the scheme would step between the depositors and the wind-up process and say to the depositors, up to the $250,000 cap, 'Here is your money, so you can go and buy your groceries.' You would almost certainly always get your money, but it might take quite a long time. People need it quickly, and the whole point of this was early access up to that cap. That is how it would work. Then the scheme would recover those funds from the wind-up of the institution. It is extremely unlikely that the scheme would fail to be repaid in that process.
Mr BUCHHOLZ: Has the RBA put a value on that for the banks? Do they pay for it?
Mr Stevens: No financial institution that has the financial claims scheme applicable—which is all deposit takers, not just large banks but all ADIs—pays for it. They do not pay a fee for it.
Mr BUCHHOLZ: Has the RBA put a price on it—on the value of that security or insurance?
Mr Stevens: We have worked out what the fee should be, but we have not done a formal calculation of that. I suspect that if you did do a calculation you would end up with a small number of basis points."
. RBA Grilling. What did Stevens say?
. Joye - The RBA is NOT the ACCC, and does not give a rat’s bum about competition
. Why the Reserve sat on its hands, why the banks might not