Thursday, November 18, 2010

Banks: Don't believe those APRA figures, believe these ones. Oh, not those ones.

The big banks have struck back at claims they have been fattening their margins, rejecting an analysis of official data that shows their costs climbing more slowly than the Reserve Bank cash rate, although differing about why they don't like it.

Commonwealth Bank chief Ralph Norris said the Australia Institute had been wrong to compare average interest rates because interest rates "climb on a linear basis, not on an average basis".

"I think that's a basic flaw in the estimation that has been undertaken by the Australia Institute," he said.

In apparent contrast the Bankers Association said the Institute had been wrong to compare "only two data points" when instead it should have "properly averaged" the data.

The Institute's calculations show the annualised rate the big banks paid on their borrowings climbed 0.88 points between June quarter 2009 and June quarter 2010 at a time when the Reserve Bank's official rate had climbed 1.36 points...

The Bankers Association pointed to other Prudential Regulation Authority data showing the big bank's ratio of net interest income to assets was little changed in that time, slipping from 2.0 to 1.9 per cent.

But the document also showed their net interest income jumping from $42.3 billion in the year to June 2009 to $45.8 in the year to June 2010.
"They used to tell us it was simple, now they are saying it is complicated, throwing every argument at it but the kitchen sink" said Australia Institute executive director Richard Dennis. "We have put the rates in a graph. People can judge for themselves."

The row came as Greens leader Bob Brown gave notice of a bill requiring banks to limit mortgage rate adjustments to moves in the official cash rate for two years.

Bankers Association chief Steven M├╝nchenberg said it would lead to credit rationing.

"The most expensive money banks raise is the money they raise overseas, and if banks can not properly price their mortgages in Australia they’ve got no incentive to go overseas and raise it," he said. "They are potentially better off limiting the lending they do in Australia."

But Professor Kevin Davis from the Australian Centre for Financial Studies disgreed, saying banks were able to structure their overseas borrowings so they were linked to Australian rates.

"This is what the banks are paid to do and shareholders are paid to wear that risk," he told the Herald.

But the Greens' choice of reference rate was wrong. A better rate would be the so-called bank bill rate which which measures market predictions of where the cash rate will be in three months time.

Both the government and the opposition will oppose the Green's bill.

"What’s been proposed by the Greens amounts to re-regulation which the Coalition never has and never will support," said Shadow Treasurer Joe Hockey. "The Greens would be better off supporting our nine-point plan to improve competition."

"Australia has been down the path of government-set interest rates before," said Treasurer Wayne Swan. "Average Australians had to go cap in hand to the bank to try to get a basic loan."

Published in today's SMH

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