Thursday, August 04, 2016

Only a royal commission will stop the banks ripping us off with impunity

Who said royal commissions don't matter? For as long as Labor was holding out the prospect of one in the lead up to the election, the banks behaved themselves.

On the first Tuesday in May, as Labor ramped up its rhetoric about a commission and the Prime Minister prepared to call the election, the big four banks passed on almost every cent of the Reserve Bank's 0.25 point rate cut. Westpac, the Commonwealth and the NAB passed on the entire 0.25 points, the ANZ passed on 0.19.

But with the election out of the way and the Coalition returned (with financial support from the banks that will be revealed shortly) they are once again acting as they would have were their behaviour not about be dissected by a royal commission: they are hanging on to a good deal of the largess the Reserve Bank handed them on Tuesday and using it to shore up their profits instead of helping their customers.

No other Australian businesses, with the possible exception of Telstra, act as if they have the right to maintain their profits no matter what. Most are busy cutting their margins to keep customers.

Westpac has even talked about a "line in the sand" which it is unwilling to cross. Westpac achieves a 14.2 per cent return on equity, the National Australia Bank 14.1 per cent, and the Commonwealth Bank, 17.2 per cent. They are extraordinarily high returns. The banks' shareholders get their money back every seven years. Many other businesses would be lucky to get it back in 12.

The window-dressing that enabled the Commonwealth Bank to pass on only $23 of what should have been a $44 per month cut in the cost of servicing a $300,000 home loan was that it was supporting its other customers by increasing the rate it paid term depositors. It's probably the only time in history a rate cut has been used to justify a rate increase. But in any event, the gift to depositors isn't what it seems. It only applies to term deposits (which are more valuable to the banks than other deposits because the capital adequacy rules mean they need less of them to back each loan) and only to certain types of term deposits. The National Australia Bank increased its rate on only one type of term deposits – those that last eight months, an adjustment so token as to be contemptuous.

Macquarie Equities believes the banks' stinginess on Tuesday will boost their earnings by 2 to 3 per cent. It notes dryly that their gifts to depositors are "likely to be unwound over time with limited impact on profitability".

Given how far Australian and international rates have been falling, mortgage rates ought to be an awful lot lower than they are.

Since it peaked in 2011 the Reserve Bank's cash rate has slid 3.25 points. Yet after a series of grudgingly small cuts including their latest, the banks will have cut their deposit rates only 2.5 points.

Since the global financial crisis the US Federal Funds rate has slid 5.5 percentage points and the Bank of England's base rate 4.5 percentage points. Each is not too far above zero, and many other international rates are negative. Our big banks have been parsimonious in passing on Reserve Bank cuts, not because their cost of funds wouldn't allow them to do so, but because of their determination to shore up their profits in the face of increasing competition from other lenders who've been stealing their customers.

It's an odd approach to losing customers that cost Woolworths dearly when it tried it a year or so back. Instead of competing on price to win them back, it quietly boosted its margins and wound back its service, losing even more as a result.

The banks probably believe they won't lose many customers, or won't lose enough to offset what they'll make by fattening their margins. History suggests they are right. No matter how many times Labor's Wayne Swan implored bank customers to "vote with your feet" and no matter how many bank-switching packages he introduced, about 75 per cent of the money lent for mortgages continued to be lent by banks, down from 85 per cent. What he investigated doing, but didn't, was to introduce a "mobile phone" style switching service where all you needed to do was to give your new lender your old account number and they would switch for you. The banks persuaded an inquiry he commissioned that their computers couldn't handle it.

The banks continue to keep customers because they are trustworthy. They are trustworthy because the government guarantees their deposits. Yet ever since it sold the Commonwealth Bank in 1991 it's been powerless to prevent them from extracting everything they can from the money-making machine it provides.

A government genuinely concerned about rip-offs would set up its own bank. Google "pension loans scheme" and you'll discover the apparatus is already in place. Or it could impose a super-tax on banks as Britain's Conservative government did at the same time as it wound back general company taxes. Until someone does, or until someone actually calls a royal commission, they'll continue to do whatever they want.

In The Age and Sydney Morning Herald