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Tuesday, October 27, 2015

Mortgage rates: the big four think they'll get away with it

Notice how quiet the big four banks have been since they jacked up interest rates?

Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.

Not too long ago the banks would have defended their rate rises on the radio and television to egg each other on. Here's Westpac's then retail chief, Peter Hanlon, in 2009. He had just whacked up mortgage rates by an extra 0.20 points on top of the Reserve Bank's rise of 0.25. "All the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding," he told radio 3AW 's Neil Mitchell. "All the banks are in the same boat, but they'll obviously make their own decisions."

It was known as the mating call of the banks. Discussing prices over the phone would have been illegal, so the banks communicated by radio.

And then the government outlawed that too. Anti-price-signalling legislation means they've got to stay silent and just hope each of the others takes the hint.

This time they have...

It's true that the smaller banks won't push up rates, because they're not affected by the new tougher capital requirements, but that doesn't much worry the big four. They figured out long ago that most of us don't change banks, even when we should.

The big four say they're pushing up rates because they've been forced to hold more capital. Until now the big banks have been required to hold embarrassingly little to back up their mortgages. The Murray Financial System Inquiry found that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.

Tying up more capital on each loan will necessarily mean a lower return, which ought to be OK. Each loan becomes safer. Overseas that's what happens – shareholders take a hit – but not here. Our big banks believe they can widen their margins, restore their profits and maintain their payouts to shareholders.

Former treasurer Wayne Swan used to rail against the banks for this sort of behaviour: "If you're not happy with your bank, walk down the road and get a better deal."

Swan set up a bank-switching hotline, required banks to hand over lists of direct debits to departing customers, and eventually abolished mortgage exit fees, but none of it seemed to help.

Even though the smaller banks offer lower mortgage rates and accept lower returns, we're reluctant to move to them. It's true that under the cover of the global financial crisis many of them became big banks in disguise. The Commonwealth now owns BankWest and most of Mortgage Choice. Westpac owns Rams Home Loans, St George and the Bank of Melbourne.

One of the reasons we are so reluctant to switch to the small guys is our distaste for filling in forms. Going to a new bank means proving your identity all over again. It means demonstrating spending and savings habits. It means revaluing your house, and not being too old to look like a good prospect. Those who do manage it are likely to be hunted down by their old banks' retention teams and bribed to stay with the sort of low rates that ought to have been available to all of the bank's customers.

The best way to make switching easy would be complete account number portability of the kind we have for mobile phone numbers. There's no need to re-establish your identity and no need to speak to your old provider. The new one switches everything across. A review of the idea in 2011 found the technology wasn't yet available, but it must be coming closer.

And there's another, sadder, reason we are reluctant to move. Some of us are comforted by high profits. An extraordinary survey by the Australia Institute finds that one in five of the big banks' customers think high profits made them safer. They are begging to be fleeced.

We're our own worst enemies, and the big banks know it.

In The Age and Sydney Morning Herald