Wednesday, November 17, 2010

Banks costs. They're increasing. But by less than the cash rate.

New figures suggest the big four banks have fattened their margins while complaining about being squeezed.

Released as parliament prepares to debate legislation that would force banks to offer mortgage contracts they could no longer vary as they wished, the Prudential Regulation Authority figures indicate the average rate paid by the big banks climbed by less than the Reserve Bank cash rate in the year to June.

"It means we have been complaining about the wrong thing," said Australian Institute director Richard Denniss. "Whereas we have been angry about banks not moving in lockstep with the Reserve, we should have been concerned their their actual costs weren't even keeping pace with Reserve Bank increases."

The figures show while the Reserve Bank cash rate climbed 1.36 percentage points between June quarters 2009 and 2010, the average rate paid by the big banks climbed 0.88 points...

The lower rate would have been because rates on some of the funds the banks borrowed climbed more slowly than the Reserve Bank cash rate.

"It's like making hamburgers. If meat accounts for a third of your costs and the price of meat goes up 10 per cent, you shouldn't be expected to put up the price of the price of hamburgers 10 per cent," said Dr Denniss.

The Bankers Association confirmed the calculations were correct. But it said they didn't reflect banks actual cost of funds.

"To be honest we can't work this out," said chief executive Steven Münchenberg. "Performing the same calculation we get the same result, but I know it is not right because if it was we would have been being beaten to a pulp with this by the government and the opposition."

Treasurer Wayne Swan pointed to separate Reserve Bank figures showing over four years the net interest margin of the big banks had "fluctuated in a relatively narrow range".

"This makes it clear there is absolutely no justification for any bank to move above the Reserve Bank," a spokesman said. "We are working on reforms and we won't let the big banks off the hook.”

The Greens opened up another front in their battle with the banks yesterday giving notice of a motion that would seek to limit profiteering on credit card surcharges, in addition to legislation that would limit ATM fees and require banks to offer "tracker rate" mortgages that were linked to a rate rather than completely variable as is the case at the moment.

Hints emerged the government's package due next month will take the revolutionary step of making bank account numbers as portable as mobile phone numbers.

At the moment the first digits of so-called BSB numbers identify the name of the bank and the branch in the same way as the first digits of mobile phone numbers originally identified the carrier. If the numbers became completely portable this information would lose meaning but switching would become simpler. The system would require new technology and the government is concerned this should not add to costs.

The consumer group Choice discussed the proposal with senior ministers and politicians from all sides and found it well received. The system could be extended to superannuation accounts.

Reserve Bank board minutes released yesterday suggest it took the Commonwealth decision to almost double its 0.25 per cent rate rise in its stride.

"Members noted that lending rates might increase by more than the cash rate," the minutes said, adding the board planned to "take account of any changes in margins" in future decisions.

Published in today's SMH and Age

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