Australia's top financial regulator has dismissed as self-serving arguments by the big four banks that they can't afford to offer so-called "tracker mortgages" whose rates would automatically rise and fall in line with the Reserve Bank cash rate.
Westpac, the Commonwealth, ANZ and National Australia banks each argued in parliamentary hearings earlier this month that there would be little demand for tracker mortgages of the kind that are offered in the United States and Britain because they would have would have to charge too much for them.
In testimony on Wednesday, Australian Securities and Investments Commission chairman Greg Medcraft tabled a 10-page briefing note he said showed each of the bank's funding costs "completely tracked" the cash rate.
"And the reason for that is not really rocket science, it reflects the fact that 60 per cent or more of their funding comes from deposits, which are based on the cash rate," he said.
"Where they get it wrong on funding, that risk shouldn't be passed to the borrower. All a tracker rate would mean is having, like in most parts of the world and in corporate Australia, a rate that is a simple margin over a benchmark."
On Monday, a small Queensland bank, Auswide, launched what is believed to be Australia's first tracker loan, offering 3.99 per cent, which would vary only in accordance with the cash rate.
The rate cannot fall below 2.49 per cent - which it would hit if the Reserve Bank cut the cash rate to zero.
Mr Medcraft said the fixed margin would last for the entire life of the loan, a better deal than was offered overseas, and said that if a little bank could do it, "a big bank can do it".
"It may be technically correct, as the banks have argued, that they don't fund off the cash rate," his briefing paper said.
"However, overall, the weighted average funding cost for a major bank is correlated to the prevailing RBA cash rate. This is because most debt securities and deposit products either automatically adjust or are hedged using interest rate derivatives against adverse interest rate movements."
"I think that this would actually assist borrowers to have greater trust and confidence in rates, which would allow them to think about switching mortgages more easily," said Mr Medcraft.
"They wouldn't be confused between movements in the margin and movements in the standard variable rate as they are today. Comparability would not be an issue."In The Age and Sydney Morning Herald