Thursday, October 04, 2012

Short changed. How banks take with one hand then take with the other


What they charge over and above the cash rate

Westpac 3.52 percentage points
ANZ 3.39 percentage points
Commonwealth 3.26 percentage points
NAB 3.15 percentage points

Long-run averages January 2001 - March 2012

Australian banks have form when it comes to failing to fully pass on rate cuts and overegging rate rises. A study just published in the prestigious Economic Record finds Reserve Bank rate rises have “a much larger and more instantaneous impact on the mortgage rate than rate cuts”.

The size of the difference is shocking. Using monthly Reserve Bank statistics on its cash rate and mortgage rates over the two decades to 2011 the paper finds on average Australian banks have passed on 116 per cent of each rate rise and only 84 per cent of each cut.

The results reflect what the authors call “aysmmetries” in both the speed and size of the banks’ reactions, with the banks typically slow and stingy about passing on cuts and fast and enthusiastic about more than passing on rate hikes.

Separate research currently being conducted by the lead author Associate Professor Abbas Valadkhani of the University of Wollongong finds that almost all of the asymmetry emerged after the 2008 global financial crisis.

“Before the crisis the gap between the Reserve Bank cash rate and each of the standard variable rates was basically constant - afterwards it widened dramatically,” he told The Age.

So dramatic is the change that in the five years after the crisis each of the big four banks has charged a higher average rate than before the crisis, despite the average Reserve Bank cash rate being lower.

“For instance the Commonwealth Bank has charged an average of 7.47 per cent since the crisis, 7.13 before. Yet the cash rate has averaged 4.72 per cent since the crisis, 5.33 per cent before. If the Banks were following the Reserve Bank the difference would be exactly the other way around"...

Professor Valadkhani finds before the crisis each of the big four moved their rates together - “they were so close that on a graph the moves were indistinguishable” - but that after the crisis they diverge

Westpac became clearly the “least friendly” with an average mark up over the cash rate of 3.52 percentage points, the National Australia Bank the most friendly with a mark up of 3.15 points. In the middle were the ANZ and Commonwealth with mark ups of 3.39 and 3.26 points.

But Professor Valadkhani says even as rates diverged there was substantial evidence of coordination. “By coordination I do not necessarily mean they they talked to each other,” he told The Age. “They might have independent decisions to copy each other.”

He finds whenever a bank has moved away from the pack in the length of time it has taken to respond to a rate move it has done it with at least one other.

“There is always at least a pair,” said. “Each of the big four has at one time or another followed each of the other big four - except for one pairing. The NAB has never followed the Commonwealth and the Commonwealth has never followed the NAB. It’s as if those two don’t know each other.”

Former Commonwealth Bank and Future Fund chief David Murray last night called on politicians not to “jawbone” the banks to pass on the Reserve Bank cut in full.

“They need to make a return on equity around 16 or so per cent,” he told ABC 7.30. “But the price they are paying for term deposits is the highest relative to swap rates I have seen. That suggests it is difficult for them to pass it on in full.”

Australia ran the risk of going the way of Greece because it was too dependent on the rest of the world for capital.

"We are not a highly productive economy. All the entitlements we want are being funded at the pleasure of people who save and live offshore," he said. "There comes a time when these people say, no I don't want to finance that any more. That's what happened to Greece and Spain and Italy.”

In today's Sydney Morning Herald and Age

Related Posts

. Why won't the banks pass it all on?

. You've got to hand it to our banks - Stevens on profits

. NAB. It's no different, it's certainly deceptive