Worried about price gouging? For banks, there’s a simple solution

Does it feel like you’re being charged more for all sorts of things these days, from groceries to banking? Turns out, you’re right.

While we might be more likely to remember prices that go up than prices that go down, the very best evidence – assembled by Australia’s Treasury, the federal government’s lead economic adviser – says your suspicions are right. We really are being charged more than we used to be two decades ago.

Coupled with the latest profit reports from Australia’s biggest supermarkets and banks, including Tuesday’s half-year results from Coles, it suggests we are contributing more to company profits than we used to.

Climbing price markups

The Treasury estimates show in the 13 years between 2003-04 and 2016-17, the average price markup – the difference between the cost of a product and its selling price – across all Australian industries climbed 6%.

That’s extra profit, taken from your wallet, going to the people selling you things.

Those Treasury estimates are contained in a background paper prepared for the competition inquiry being undertaken by a panel including Productivity Commission chair Danielle Wood, former Competition and Consumer Commission chief Rod Sims, and business leader David Gonski.

At the same time, the average share of each industry held by its biggest four firms edged up from 41% to 43%.

Profit margins are also higher here than in more competitive markets overseas.

This is true in banking, where the big four have taken over St George, BankWest, and the Bank of Melbourne – and are about to take over Suncorp.

It’s also true in supermarkets, where the big two, Woolworths and Coles, have taken over or seen off Franklins, Bi-Lo and Safeway.

Bigger profit margins than overseas

Coles supermarkets reported earnings before adjustments of A$1.73 billion on sales of $19.778 billion in the half year to December – a profit margin of 8.7%.

Last week, Woolworths supermarkets reported earnings of $2.45 billion on sales of $25.648 billion – a margin of 9.6%.

By way of comparison, the dominant UK supermarket group, Sainsbury’s, has a profit margin of 6.13%.

In banking, the Commonwealth Bank has just reported a return on equity (profit as a proportion of shareholders’ funds) of 13.8%. National Australia Bank reported 12.9%.

While on a par with the big banks overseas, those recent returns are a good deal higher than CommBank’s 11.5% and NAB’s 10.7% reported two years ago.

Little hope for groceries

For supermarkets, there’s not a lot the government can do, apart from launching an inquiry, and perhaps giving Australian authorities the power to break up firms that abuse their market power.

But Prime Minister Anthony Albanese has said he isn’t keen on giving Australian authorities the sort of powers available to authorities in the United States and the United Kingdom, saying (incongruously) Australia is “not the old Soviet Union”.

And doing anything short of that would be unlikely to have much effect. Australia’s two supermarket giants have invested a fortune in high-tech warehouses and distribution systems, which new rivals would be hard-pressed to match.

Hope for more competitive banking

But for banks it’s altogether different. Richard Denniss of the Australia Institute has come up with the idea, and it’s a beauty.

It’s for the government to provide a low-cost banking service – expanding on services it already offers.

The costs would be so low, other banks might decide to add features and resell them in the same way as resellers sell mobile phone and NBN services.

The primary function of any bank is to provide a numbered account into which Australians can deposit and withdraw funds.

The Australian Tax Office does this already, at an incredibly low cost.

The tax office gives every working Australian a tax file number. Employers deposit money into these accounts, and – should the tax office owe a refund – taxpayers withdraw them.

Some taxpayers ensure their tax is overpaid, so they withdraw later.

Denniss describes it as a bank account with the world’s clumsiest interface.

The government could offer bank loans

It wouldn’t be much of a stretch from improving that interface to offering government loans.

In fact, government loans are already provided in some circumstances: such as to retirees with home equity through the home equity access scheme, and to Centrelink recipients through advance payments.

It woudn’t be much more of stretch to provide loans more broadly, at an incredibly low administrative cost. The government already lends against the value of homes.

Back in the days when the federal government owned the Commonwealth Bank, it had to cover the high costs of running bricks and mortar branches.

Freed from those costs, the government could now offer a low-cost, technology-enabled basic banking service that would tempt us away from the big four banks – unless they offered better value.

Of course it would cost money, although a lot of it has already been spent setting up the system of tax file numbers and accounts. And of course the banks would hate the idea. That would be the point.

But doing what we can to stop Australians being overcharged is important, not only for wage earners but also for businesses.

The competition inquiry the government has launched is a good start. It shouldn’t be frightened about where it might lead.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Book review. Banking Bad, A Wunch of Bankers

Banking Bad, Adele Ferguson, ABC Books, $34.99
A Wunch of Bankers, Daniel Ziffer, Scribe, $32.99
It’s Your Money, Alan Kohler, Nero, $34.99

Inertia can be deeply unhelpful. On those rare occasions when important parts of our world really do change, as they did in the 1980s when our banks suddenly started behaving monstrously, we react as if they haven’t, as if each new piece of bad news is isolated and our financial institutions remain on the whole "world class", as one leading commentator infamously claimed while warding off calls for a royal commission.

Each time an insider from the Commonwealth Bank approached journalists from The Australian and The Sydney Morning Herald before he found Adele Ferguson, they'd tell him the story was "too complicated, too risky, too much work, too this, too that".

Australia's most venerable bank – the one we let into our schools – couldn't be completely rotten.

I thought that myself, even while spending time with the first wave of bank victims who'd been plied with foreign-currency loans whose repayments had exploded to more than their businesses and properties had been worth, taking everything they had.

I put them on PM and AM on ABC radio. But I kept my equilibrium. Surely the banks were still trustworthy institutions that had themselves been victims of currency gyrations just as their customers were. They can't have intended to make them destitute.

David Murray

The first inkling I had that the banks might no longer care about their customers came in a conversation with David Murray, then the head of, or about to become head of, the Commonwealth Bank, and for me the most intriguing person in Ferguson's book, Banking Bad.

He told me the victims of currency loans must have known the risks. One was a maths teacher. But my mother had been a maths teacher and she wouldn't have known the risks unless they had been carefully pointed out to her.

I put it down to an unfortunate lack of empathy on Murray's part, not to a change in the nature of the institution he led.

Ferguson documents the change, while unintentionally documenting her own repeated struggles with inertia as she came to realise the banks were not only selling loans that couldn’t be repaid, not only earning fat commissions and a healthy margin on the currency each time those customers tried to trade their way out of trouble, not only ordering staff to sell products they had no reason to believe were right for their customers (playing happy tones into their ears when they made phone sales and sad tones when they did not), not only deducting fees for advice from the accounts of customers who had died or no longer had advisers, not only allowing crime syndicates to launder money through high-tech automatic machines that whisked it overseas before it could be checked, but also – heartbreakingly – refusing to pay out insurance claims in the face of medical advice that they should, and dragging out cases until their terminally ill customers died or ran out of money (which they could determine by checking their accounts).

Murray was 42 when he was offered the top job at the newly part-privatised Commonwealth Bank. He'd joined it as a teller when it was a public institution with a public-service culture. "It's a bit early, isn't it, for me?" he told the chairman, before transforming it – closing branches, sacking staff, rewarding tellers for sales rather than service, buying an insurer whose products they could upsell, setting up a stockbroker and financial planning arms whose products they could upsell, and imposing relentless never-ending targets. The bank manager at Goulburn in rural NSW was told to sell 150 loans a week. Goulburn had only 10,000 income-earning adults, and four big banks.

It would be tempting to think it was only the bank's staff who cut corners, because of the pressure placed on them. But time after time Ferguson details what happened when their bosses found out.

"Dodgy Don", a financial planner whose legendary ability to sign customers up for almost anything put him at the top of the Commonwealth's league table, was suspended when the bank discovered he had been charging improper fees, putting clients into products for which they were totally unsuited and slipping back-handers to tellers who sent victims his way. Then he was reinstated and promoted to "senior planner".

Staff who tried to help victims were discouraged. At least one was made to sign a legal agreement not to.

Ignorance on the part of the victims, each one believing he or she was alone, was essential if they were to keep quiet and the good public image of the bank maintained.

That's why when Ferguson's Four Corners program (same title as the book) exploded onto the screens in 2014 she was inundated with emails and calls from victims who'd paid up or kept quiet, not knowing they had been part of something systematic.

In Parliament, it was the Nationals who pushed hardest for the royal commission. Several had been victims themselves. Labor, perhaps less in touch with voters, was cautious. The Liberal Party was either profoundly ignorant about the behaviour of the banks or thought it was OK. It blocked just about every move to treat customers better, including (bizarrely) attempting to remove a legislated requirement that financial planners act in the "best interests" of their clients.

When the Liberal Party succumbed, it made the commission's time-frame short and added in a reference to trade union-associated industry super funds, about which there had been hardly any complaints and to which the commissioner gave a clean bill of health.

Ferguson, who covered the hearings for The Age and The Sydney Morning Herald, was astounded by what she heard (some of it was new even to her), but disappointed by the result.

"Vertical integration" of the kind pioneered by Murray at the Commonwealth Bank will be allowed to continue, although for the moment the Commonwealth and two of the other big banks have abandoned it. Murray himself had gone on to chair the Future Fund and then the government’s financial system inquiry, in which he warned against the dangers of vertical integration. During the royal commission AMP appointed him as its chairman, to "lead the redevelopment of governance processes".

Daniel Ziffer doesn't suffer from inertia.

His book, A Wunch of Bankers, is a super-charged flight through the absurdity of the year he spent reporting from the commission for ABC TV.

He gives us the good bits: the Commonwealth Bank might have charged dead people for financial advice, but AMP charged dead people for life insurance.

National Australia Bank flicked commissions to "introducers": gym instructors, architects and other trusted non-experts who pushed $24 billion in loans its way.

The financial services firm IOOF, whose website says it has been "helping Australians achieve financial independence since 1846", decided against putting its members into better products on the grounds they were generally disengaged and wouldn't know the difference.

An unnamed director protested, using caps for emphasis: "In what circumstances would it NOT be in a client's best interest to transfer to the new pricing if it was lower than their existing pricing?"

The unnamed hero later asked, in an observation Ziffer describes as "meta": "How would this look on the front page of The Age?"

Alan Kohler offers practical advice about how not to get ripped off by the finance industry, enlivened with insights from the commission and the inquiries that went before it.

It’s Your Money is an extraordinarily valuable book, but only for people able to take control of their money. As he concedes, many people can't, and it's up to the authorities to protect them. The authorities have failed in that job for the best part of 40 years.

The government has before it recommendations that would help, not only from the royal commission (and unfortunately the government has already backed away from the commission's recommendation regarding mortgage brokers), but also from the Productivity Commission, whose plan to put every new worker into a good super fund is being opposed by an unholy coalition of retail and industry funds.

It's up to those of us who can to keep up the pressure. The financial services industry will. It's been shamed, but never remains shamed for long. Among people who weren't paying attention, it still has a good public image.

In The Age and Sydney Morning Herald

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Cry for the banks. They'll pay more than they'll save

Australia’s big four banks and their shareholders will recover very little of the new major bank levy from the proposed cut in company tax, a Fairfax Media analysis has found.

In fact, the proposed company tax cut and the major bank levy would leave banks more highly taxed than they were before the 2017 budget.

The levy, which came into force in the middle of last year, is expected to raise $1.6 billion a year from each of the big four banks and Macquarie Bank.

After adjusting for one-off restructuring costs incurred by the National Australia Bank, the most recent annual profits of the big four - ANZ, Commonwealth, NAB and Westpac - amount to $43.7 billion.

They paid $13.168 billion in tax, an effective rate of 30 per cent.

The tax cut before the Senate, from 30 per cent to 25 per cent, would cut the big four’s tax bill by $2.2 billion. But most of their shares are held by Australians eligible for dividend imputation, meaning that up to three-quarters of the revenue lost as a result of the cut would be clawed back in higher tax collections from Australian shareholders who received lower dividend imputation cheques.

The net cost to revenue is likely to be as little as $570 million per year at current profit levels, only around one-third of the extra $1.6 billion the big four and Macquarie will pay in the major bank levy.

The findings accord with a claim made in parliament last week by Treasurer Scott Morrison that by the time the major banks received the full benefit of the proposed cut in the company tax rate to 25 per cent in 2026, they will have paid an extra $16 billion to the government in the bank levy.

Other tax measures under consideration by the government that would help offset the cost of the company tax cuts and gain favour with crossbench senators include an increase in the petroleum resource rent tax and a new tax on e-commerce giants such as Google, Facebook and Uber. The budget papers provide for $3 billion in “decisions taken but not yet announced”.

The Australian Bankers Association declined to comment on whether the major banks would pay more in the levy than they would gain from the proposed cut in the company tax rate, referring questions to the Business Council.

A spokesman for Business Council chief executive Jennifer Westacott pointed to comments she she made this month where she said there was no case for exempting or 'carving out' or banks from the tax cut.

"They are paying a levy of $1.6 billion a year. Are we seriously going to punish the shareholders, the mums and dads?" she asked. "Are we seriously going to punish everyone in the banking system, the regional bank manager who's been helping out a local community for years?"

In parliament on Monday, Mr Morrison again refused to quantity the budget cost of the 10-year program of company tax cuts and the year-by-year cost of his three-stage program of personal income tax cuts.

In a Senate estimates hearing on Wednesday, officials from the department of finance are expected to refer to the Treasury questions about the cost of both sets of tax cuts. The Treasury will appear before the committee next Tuesday.

Labor Treasury spokesman Jim Chalmers said his party would try to split the personal income tax cut bill, supporting only the first wave of tax cuts due to start in July.

He held open the possibility of supporting the second of the three waves of tax cuts set down for 2024.

“We have made our view abundantly clear on the first part of it for low- and middle-income earners; we've said we're not wild about the third stage, which is two elections away, but we have got more discussions to have on that intermediate stage,” he said.

In The Age and Sydney Morning Herald

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How the Coalition ran interference for the banks

The Coalition wasn't merely asleep at the wheel when it came to the practices being exposed at the banking royal commission: it pulled out all stops to allow some of them to continue, including attempting to circumvent the will of parliament, in an extraordinary 12-month burst of activity that began within weeks of its election.

It had inherited Labor’s Future of Financial Advice Act, legislated in 2012 but not due to take full effect until mid 2014, 10 months after the election that swept it to power.

The result of a parliamentary inquiry and years of agonising about how to protect consumers in the wake of the collapse of investment schemes including those run by Storm Financial, Timbercorp, Opes Prime, Bridgecorp, Westpoint, Trio and Commonwealth Financial Planning Limited, the law banned secret commissions and, from that point on, required financial advisers to put the interests of their clients ahead of their own.

Actually, it came into effect on July 1, 2013 during the life of the Gillard Labor government, but the Securities and Investments Commission decided to take “a facilitative compliance approach”, meaning it wouldn’t enforce it until July 1, 2014, which turned out to be after the Coalition took office.

The law banned kickbacks and commissions paid to advisers by the makers of the products they were selling, which for the dangerous products had been extraordinarily large. Advisers putting retirees into Storm Financial had been paid 6 to 7 per cent of the amount invested. Advisers putting clients into Timbercorp had been paid 10 per cent plus an ongoing fee for as long as the funds stayed there.

Labor’s law wound back, but did not completely eliminate, the ability of banks to reward their staff for recommending the banks’ own products, and it only applied prospectively. Existing kickbacks could remain but clients would have to be told how much money was being taken out of their investments each year and would have to approve.

Once every year they would be given a statement explicitly telling them how much of their funds was being siphoned off to pay their adviser. Once every two years they would be asked if they wanted it to continue. If they said "no" or said nothing (which would be the case if they were dead, or the adviser had lost contact with them) the outflow would stop.

Clients who felt they were continuing to get good service from their adviser could allow the withdrawals to continue, which might be why it so terrified the (largely bank-owned) advice industry.

Days before Christmas 2013 the Coalition outlined amendments it hoped to get through parliament. Fee disclosure statements were only to be provided to new clients. Old ones could remain in the dark. And there would be no need for clients to opt in to having money removed from their accounts, ever. And there would no longer be an overarching requirement for advisers to act in the best interests of their clients, merely steps they would have to follow, “so that advisers can be certain they have satisfied their obligations”.

As July 1 2014 approached and it looked as if the amendments wouldn’t get through parliament, Finance Minister Mathias Cormann gazetted regulations that purported to have the same effect. Parliament would have been able to disallow them when it next met, but he delayed tabling them until the last possible moment, lengthening the period of time they were in force without being tested. Then Labor trumped him by reading them out aloud in the Senate, which effectively tabled them and forced a vote. Cormann managed to get the Palmer United Party on side and keep the regulations at first, until Jackie Lambie split with Clive Palmer over the issue and left his party and voted them down.

Then, when all had been lost, the banks and financial advisers begged for more time. They have been "thrown into disarray" and wouldn’t have their systems ready. ASIC said it wouldn’t enforce the law until July 1, 2015, two years after it had been due to begin.

ASIC and Cormann had given the financial advice industry an extra two years in which to charge commissions and escape an overarching requirement to put the clients first.

Even now, all this time later, I can’t work out why Cormann tried so hard.

Looking back over the emails we exchanged, I can see that he distinguished between "sales" and advice. He said that financial advice should be commission-free, but that "sales" were different, which is what the banks were arguing.

And advisers should be allowed to limit their advice about just one topic, such as superannuation, without the need to take everything into account and weigh up their client's best interests (as do doctors and lawyers, who have to put their client's best interests first regardless).

He said the requirement for clients to opt in to making continuing payments to advisers was "red tape", and "retrospective".

“Peter, I have honestly tried my best to do the right thing in the public interest,” he wrote. “I don’t expect that any of this will change your mind, but I thought you should know why we are doing what we are doing.”

In The Age and Sydney Morning Herald

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'Benefit of hindsight': ASIC may have been wrong body

One of the architects of Australia's financial system has expressed doubts about the policing power given to one of the corporate regulators now under fire for failing to prevent fraud and deception by the banks.

Professor Ian Harper was a member of the Wallis committee of inquiry into the financial system which in 1997 recommended the creation of a specialist organisation to regulate financial markets and financial institutions known as the Australian Securities and Investments Commission, or ASIC.

He later chaired the Harper Competition Review for the Abbott and Turnbull governments, and is a Reserve Bank of Australia board member.

Critically, the Wallis recommendations allowed ASIC to take over responsibility for policing consumer laws previously conducted by the Australian Competition and Consumer Commission.

On Tuesday Professor Harper said at the time the committee had thought a specialist body would be better able to handle the complex nature of consumer financial products, although he conceded that even then there was concern it would become too close to the institutions it regulated.

“The argument in favour of leaving consumer protection with the ACCC was that it wouldn’t be captured,” Professor Harper told Fairfax Media. “One day it deals with the electricity industry, the next day it deals with Coles and Woolies. It doesn’t have time to become close to the industries it polices.

“The argument against a specialist regulator is that it will succumb to the ‘Stockholm Syndrome’, that the regulator and the industry will hire from each other and go to the same conferences and so on.

“We now know of clear cases in which ASIC has been misled. Would it have tried harder, would it have made further inquiries had it been less close to the organisations it regulated? It might have.”

Regulatory agencies like ASIC have come under fire at the royal commission but are yet to appear at hearings. Asked if the ACCC would be prepared to take back responsibilities ceded to ASIC a spokesman for ACCC chairman Rod Sims declined to comment.

Professor Harper said concern about being too close to industry was one of the reasons the Wallis Review recommended the creation of a body separate from the Reserve Bank to oversee the prudential health of the retail banks.

“I have already said that with the benefit of hindsight we were wrong about several things,” Professor Harper said. “We placed too much faith in the efficient market hypothesis and in light touch regulation, we said the government didn’t need to guarantee bank deposits.

“With the benefit of hindsight and what's been coming out at the royal commission, the weaknesses of the specialist approach we took to regulation are also evident.”

It was “quite apparent” that the ACCC would have been able to handle the complexities inherent in financial products without needing to defer to a specialist body, he added. He noted the competition watchdog was more than capable of handling energy pricing, petrol pricing and the complex relationship between petrol stations and supermarkets.

Had it retained responsibility for policy consumer laws as well as responsibility for competition laws governing market power and mergers and acquisition which it kept, Australia’s financial landscape might have been different.

“It was 20 years ago, we would have been expected to learn something,” Professor Harper said.

The royal commission hearings will reconvene on Thursday.

In The Age and Sydney Morning Herald

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A modest proposal for better behaved banks

Suddenly, banks are behaving nicely. They are no longer charging for the use of teller machines, the chief executive of the National Australia Bank took a day out of his $6.6 million a year job to sell copies of The Big Issue, and from this week it’ll be really, really easy to transfer funds. It’ll take seconds rather than days, and you won’t need to look up a BSB. You’ll be able to use a phone number or email address instead.

Could it get any better? Absolutely, and the route is spelt out in one of the submissions to the Productivity Commission’s inquiry into competition in the financial system, which is running in parallel with the banking industry royal commission.

The Productivity Commission has found that, notwithstanding the banks’ belated success in bringing service into the 21st century, they and their competitors aren’t particularly competitive. There’s half as many of them as there used to be in 1999. Instead of charging all their customers the best possible rate as competitive firms would, they charge their existing mortgage holders $66 to $87 a month more than new ones, in what amounts to a penalty for loyalty.

In the words of the commission’s draft report: “rivalry through price competition is rarely evident”. Half of all bank customers don’t switch banks, and the banks count on it.

Over time their prices tend to converge, as might be expected in a competitive industry, but the commission finds that they don’t necessarily converge on the lowest possible price, which is the sign of an industry that is not competitive.

The smaller banks aren’t much help. Their operating costs are much higher than the big ones, and on the occasions when the government has given them a leg-up to cut those costs, they've used it to boost their margins rather than cut their prices.

When the Prudential Regulation Authority prevailed on the banks to cut the flow of interest-only loans to investors, they did it by lifting what they charged on all interest-only loans, new and existing, in an inversion of their usual practice of reserving special treatment for new customers.

Their average margin on those loans climbed from 3.5 percentage points above the cash rate to almost 4.5 points, producing a nice extra profit that they didn’t compete away by charging other customers less.

The commission wants it made easier for new banks to enter the market to take on the old ones, and it wants the competition regulator to police them in the same way it polices petrol stations.

But it hasn’t taken on board – yet – a much more powerful proposal from one of its own, Dr Nicholas Gruen, who used to be a productivity commissioner.

He says we’ve made our biggest productivity gains by destroying the understructures that allowed protected industries to overcharge and provide bad service. We slashed tariffs, ushering in much cheaper prices for clothes and cars. We presented Telstra with a competitor and then with several more. We did away with the two-airline policy. All in the 1990s.

The few cozy restrictions that survived – such as those for taxis, pharmacies and newsagents – are being rendered redundant by technology. It’s increasingly easy to order rides, drugs and news online.

About the only demonstrably non-competitive industry left is banking (although electricity and gas retailers deserve a special mention, which I’ll save for another day).

How much do banks overcharge us? A Bank of England study finds that if the bank itself (the equivalent of our Reserve Bank) offered its own banking services direct to customers on the same terms as it offers them to the banks, which is cost recovery, and if it did it in digital currency, it could permanently lift GDP by 3 per cent.

By way of comparison, our Treasury finds that the proposed cut in the company tax rate (which would have to be financed by increasing other taxes) would permanently lift GDP by 1 per cent.

The Bank of England number may well be an overestimate, but by definition it would cost us nothing. The central bank (in our case the Reserve Bank) would offer deposit and mortgage services at cost.

And it would do it for super, as suggested last year by former treasurer Peter Costello. The government-run super funds (those for public servants) return an enormous 2.2 percentage points a year more than the retail funds, and a handy 0.6 points more than industry funds. The government has advantages others do not. It has massive scale, it actually runs the financial system, and it is trusted in a way the private sector is not.

Gruen isn’t suggesting for a moment that the private banks would disappear. He doesn’t want that. He merely wants them exposed to the same sort of competition that Woolworths and Coles have faced from Aldi – competition from the lowest cost provider.

The competition would have to be fair, there would have to be no tax advantages. But if it is possible to provide an essential service at the lowest possible cost, it is worth asking why we wouldn’t. It's worth asking why we would continue to protect banks when almost every other industry that overcharges us has been made to stop.

In The Age and Sydney Morning Herald

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The Coalition and the banks: wingman turns inquisitor

What is it with banks? The Coalition began dismantling the rules Labor had put in place to protect the public from them within weeks of taking office.

The task fell to Arthur Sinodinos, a former chief of staff to prime minister John Howard who had come to parliament from the National Australia Bank.

Labor's Future of Financial Advice Act banned conflicted remuneration (bonuses for tellers and other staff who steered customers towards profitable products) and imposed an overarching obligation on financial advisers to act in the "bests interests" of their clients.

Sinodinos said the "best interests" requirement would go. Bonuses would still be allowed under certain circumstances. Also out would be requirements that financial advisers inform existing customers how much they are removing from their accounts in the form of commissions, and to ask them to renew the arrangement every two years. They were "burdensome red tape".

When Sinodinos stepped aside to give evidence to the NSW Independent Commission Against Corruption on another matter, acting minister Mathias Cormann took up the case. The first letters informing customers what they were paying in commissions were just about to go out when, while the parliament wasn't sitting, Cormann had the Governor-General gazette a regulation that removed the requirement, a regulation that couldn't be disallowed until parliament next sat and it had been tabled, something he delayed as long as possible.

He gazetted the regulation on the day a Senate committee headed by Nationals senator John Williams found that the financial planning division of the Commonwealth Bank had engaged in "forgery and dishonest concealment of material facts" and called for a Royal Commission.

Later Fairfax Media and the ABC revealed that commission-based staff at the Commonwealth Bank had been selling life insurance policies with definitions that denied payouts to Australians who had had heart attacks.

In recent months the present minister Kelly O'Dwyer has been making it a priority to disrupt the governance arrangements of the only sector that seriously takes on the banks: the non-profit low-fee industry super funds.

Why has acting as wingman for the banks been so important to the Coalition? It'd be lovely if the Royal Commission found out.

In The Age and Sydney Morning Herald

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Standard gauge no more. How the Reserve Bank is about to make our money fly

Why is it so hard to move money?

In part, for the same reason our trains are the shape they are, and our cars, and perhaps even our space shuttles. Nothing gets designed from scratch.

In the US (and Australia) the standard rail gauge is 1435 mm, which was 4 feet 8.5 inches. It was copied from England, where it had been used for trams, whose designs were copied from horse-drawn wagons.

The wheels of the wagons were that distance apart in order to fit into the ruts that were first cut into long-distance roads by Roman chariots. The Romans made their chariots that width so that each could be pulled by two horses.

And the connection to space travel? Each space shuttle had two big booster rockets attached to the sides of its fuel tank. The shuttles were launched from the Kennedy Space Centre at Cape Canaveral in Florida. But the booster rockets were made in Utah, from where they had to travel to Florida by train. You can guess the rest.

The boosters could have been wider, but the train had to travel through a tunnel, the width of which was related to the width of the tracks, which were related to the width of the ruts made by chariots on British roads, which were related to the width of Roman horses.

It's the same for Twitter, whose (generally popular) limit of 140 characters was set in its early years as a service delivered by mobile phone texts that were limited to 160 characters. After setting aside 20 characters for the delivery address, Twitter offered 140 for the message.

The number 160 came from a German communications researcher who in 1985 sat at a typewriter tapping out random sentences to figure out just how small a message could reasonably be and still fit in the small amount of extra bandwidth allocated alongside the space for mobile phone calls by the emerging GSM global system for mobile communications.

It's the same with typewriters. Most of us type on a keyboard whose top row begins with QWERTY. It was set up that way in the late 1800s in order to separate the keys of the letters commonly typed together on manual typewriters in order to ensure they didn't jam (or perhaps because that was the best way to type Morse code, the stories differ).

Centuries on, we still use the inelegant QWERTY even though we don't need to, although for better or worse Twitter says we are about to get 280 characters.

Which brings us to money. Have you ever wondered why we can't transfer it in real time, and why internet banking limits you to a miserly 14 characters to identify the reason. It's because the system it is built on dates back an awfully long way, back to the days of computer punch cards. The message length was then 80 characters because that's how many holes there were in the punch cards. It got crunched to 14 as more of the holes got used for other things.

Until now. Adrian Lovney, chief of the new payments platform that will be rolled out from Australia Day describes it as an "entirely new set of rails". Built from the ground up it will allow us to use email addresses or phone numbers instead of BSBs and it will give us 280 characters rather than 14. Down the track it could give us more, if we need them. And it'll transfer money within seconds rather than overnight.

The company that's building it is owned by the Reserve Bank and the 12 biggest private banks, but it'll be used by the lot. Like microwave ovens and GPS tracking, we'll soon wonder how we ever lived without it, at least until a few decades down the track when it is baked into future products and holding us back.

In The Age and Sydney Morning Herald

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ASIC chief: The banks are having us on over tracker mortgages

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

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Tracker mortgages. How banks could be made to do their job

Our biggest banks could be forgiven for thinking they've survived the worst. Coached within an inch of their lives by crisis management teams, their chiefs batted off 12 hours of questions before the parliament's economics committee this week without too much apparent damage.

But the committee is yet to report. When it does, there's a chance it'll recommend something every bit as frightening to the banks as a royal commission. It's called a "tracker mortgage" and it would force them to work for their money rather than take it. It would give the rest of us the same rights in our dealings with banks as we have in our dealings with just about with everyone else. Who else other than banks can change the price of what we've bought after we've bought it?

Energy companies can't. They sign us up to contracts that offer a fixed percentage off a regulated price. During the term of the contract the price can change, but only in accordance with changes in the regulated price. Nor can builders, painters, dentists and all manner of other service providers. They charge what we've contracted to pay, whether they end up liking it or not.

Kevin Davis, research director at the Australian Centre for Financial Studies, points out that bank executives are paid handsomely for managing risk, but that in Australia they are able to pass most of that risk onto their customers. "A bank which is funding housing loans in a way which subsequently becomes relatively expensive can simply increase the rate it charges to existing borrowers," he writes in a submission to a Senate inquiry. "A bank which had its credit rating downgraded and faced higher funding costs could pass that onto both existing and new borrowers, rather than it impinging directly on shareholder profits".

It can't happen in the United States, Japan, Korea, Canada, or most of the countries with which we usually like to compare ourselves. There the banks contract to charge a fixed amount over an indicator rate for the term of the contract. Visitors from those countries find our completely variable rates "amazing". Davis says he is not sure why we are unusual. He says it could be because our contract evolved before the 1980s when rates were subject to a government cap. When the cap was removed "the characteristics of the mortgage contract were not reviewed".

He wants the government to prohibit loan contracts "which give lenders absolute discretion to change the interest rate on existing loans". It wouldn't mean tying mortgage rates to the Reserve Bank's cash rate. It would have to be a rate more relevant to their predictable funding costs such as the 180 day bank bill rate. Or the banks could offer fixed rates as they do already. The Greens agree, and the questions asked in this week's hearing suggest other members of parliament are warming to the idea.

It'd salvage something lasting out of what to the banks has been an exercise in PR.

In The Age and Sydney Morning Herald

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Defenders of banks are the ones who don't get capitalism

Why on earth am I attacking the banks? "They make profits, that's the way the capitalist system works," or so I have been told repeatedly since I questioned their decision to hang on to a good chunk of last week's official Reserve Bank cut in interest rates instead of handing it to their customers.

"It's not the job of government to dictate the margins of business," one of their shareholders told me. "Profits are the basis of free-market capitalism," another wrote.

That second claim is only partly right. And yes, sometimes it is the job of governments to restrain profits.

The founder of modern economics Adam Smith was the first to mount a case for the pursuit of profit.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner," he wrote more than two centuries ago. "But from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love."

The search for profits - the search for that extra money that exceeds the cost of production - is what motivates the brewer, the baker and the banker. Without it they wouldn't bother. Yet miraculously, in pursuing profits each of them (Smith believed they were each men) ends up providing almost exactly what we need.

"He intends only his own gain," the author of The Wealth of Nations went on, in the sentence that came to define him. "He is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention."

I'm with Smith, completely (as you would expect from an economics editor). But reread him and you'll see that he isn't actually defending high profits, or even profits at all...

He is defending the pursuit of profits. As the American satirist PJ O'Rourke notes in his excellent book about The Wealth of Nations, Smith thought attempts at super profits would be competed away. That was how the pursuit of profit benefited customers. Unrestrained profits were "always highest in the countries which are going fastest to ruin".

On Wednesday the Commonwealth Bank announced an unrestrained record profit of $9.45 billion. Its return on equity was well above 15 per cent at 16.5 per cent, way in excess of the 11 or 12 per cent typical of companies listed on the stock exchange, and far above the typical return for unlisted companies which is closer to zero.

The figures show the Commonwealth went out ahead of the other Big Four banks in announcing it wouldn't pass on the full cut because its net interest margin (the difference between what it pays for money and what it charges) had slipped from 2.09 to 2.07 per cent. It wanted to build the margin back up.

There was nothing to stop it.

In the United Kingdom a week later, greater competition and a sense of decency obliged all of the big banks to fully pass on the Bank of England's cut. The banks over there get by with returns on equity of less than 10 per cent.

There's something wrong with a culture in which investors expect such obscenely large returns in order to invest. Australian Competition and Consumer Commission chief Rod Sims sees it repeatedly when airports, ports and the like are privatised.

In order to get its sale of the Port of Melbourne over the line, the Victorian government at first offered to lift the rents charged by the port 750 per cent. The federal government got a magnificent price for the Sydney Airport by doubling landing charges, removing the regulation of landing charges and offering the new owner right of first refusal over any second airport. The new owners probably run the facilities better, but from the point of view of their customers, there's scarcely any point.

"I've always felt that commercial enterprises are better off in the private sector," Sims tells me. "But the only way the community benefits from that better operation is if either they are being sold into a competitive market, or if it's not competitive [as with electricity distributors], there's appropriate regulation in place.

Within months of taking over, the new operator of the port of Newcastle raised its fees 50 to 60 per cent. It then revalued the port it had bought for $1.75 billion to $2.4 billion. It did exceptionally well at our expense, but the government that sold the port did not.

Last year University of Queensland economist Paul Frijters and University of NSW economist Gigi Foster examined the make-up of the BRW 200 Rich List. More than half had made their money from property (where rezoning helps), from mining (where leases are granted) or from investments. They concluded most of Australia's richest got there in industries subject to political favours, hardly any by inventing something new.

It's a mentality that's holding Australia back while enriching those lucky enough to be in those industries. It's why shareholders get upset when I talk about our banks. It's why we need real competition, or regulation. To make them work for us.

In The Age and Sydney Morning Herald

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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

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Banks short-change mortgage customers

Australia's biggest banks have short-changed their mortgage holders by passing on only a fraction of the Reserve Bank's 0.25 percentage point cut in interest rates, several of them choosing to reward depositors instead by lifting term-deposit rates.

The Commonwealth Bank will cut its standard variable mortgage rate from 5.35 per cent to 5.22 per cent rather than 5.10 per cent, meaning customers on a $300,000 mortgage will get a benefit of only $23 a month instead of $44.

At the same time, it will lift its one, two and three-year term-deposit rates to 3 per cent or higher, in a decision it says considers the "needs of both borrowers and savers".

The National Australia Bank and ANZ banks will be more stingy still, cutting their standard mortgage rate by just 0.10 and 0.12 points to 5.25 per cent. Westpac cut its standard mortgage rate by 0.14 points to 5.29 per cent.

The cuts follow a decision by the Reserve Bank to cut its money-market cash rate to an all-time low of just 1.5 per cent in order to boost employment and economic growth. The Bank will expand on its reasons on Friday in an economic statement that will spell out its concerns about underemployment and a sluggish labour market.

In his statement announcing the cut, Governor Glenn Stevens downplayed concern that it would reignite housing prices, saying the most recent information suggested that housing prices had been rising "only moderately over the course of this year, with considerable supply of apartments scheduled to come on-stream over the next couple of years."

Growth in lending for housing purposes had slowed. "All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished," the Governor said.

The cut is the second this year and the 12th in the five years since the peak of the mining boom in 2011. At the height of the boom, the cash rate was 4.75 per cent and the standard variable mortgage rate was 7.8 per cent.

Watermark Funds Management investment analyst Omkar Joshi estimated the Commonwealth would save itself roughly $400 million by cutting its mortgage rates by 0.13 percentage points instead of 0.25 points. The saving would be offset to some extent by the extra cost of paying more to term depositors.

Treasurer Scott Morrison supported the banks' actions but said it was up them to explain them, rather than him.

"What I am saying is that they have lifted deposit rates and that obviously comes at a cost as well for them in terms of what they pay out, so they've got a package of response to this rate announcement. Now in a very low-rate environment, which we are clearly in, then for the banks to be able to actually say something to depositors, it's not often when you get a cut in the cash rate that depositors actually get a bit of good news," he said.

Asked whether the banks could have passed on the full amount he said there was "no real argument based on cost of funds that would mean that they shouldn't pass those on.

"But I do note that they have actually taken another action and that is to lift deposit rates," he said.

"You've got to look at the deposit-rate increase and the mortgage-rate decrease as a package of response."

The National Australia and Commonwealth banks announced their decisions within two hours of each other, the others following later. In 2011, the then-treasurer, Wayne Swan, introduced special price-signalling legislation, which made it illegal for them to communicate their decisions to each other.

Mr Morrison passed up an opportunity to attack them for their decisions saying he wanted to get away from "the same merry-go-round of all of those sort of opportunistic responses that happen after a rate decision by a bank".

The Reserve Bank's statement gave no guidance as to when it would next cut. Financial markets are pricing another cut of 0.25 points by next May.

 

How the big banks cut

Westpac: 5.29% (cut of 0.14 points)

NAB: 5.25% (cut of 0.10 points)

ANZ: 5.25% (cut of 0.12 points)

Commonwealth: 5.22% (cut of 0.13 points)

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Reserve Bank rate cut: Why did banks respond as one?

Our biggest banks move fast. Either that, or they collude. At 2.37pm on Tuesday, within minutes of the Reserve Bank cutting its cash rate to an all-time low, the Commonwealth Bank announced a completely different way of responding. Instead of passing on some or all of the cut, it would only pass on half and hand some of the rest out to customers as higher term-deposit rates.

Less than two hours later, at 4.31, the National Australia Bank had announced its own variant on the idea. Either it had very quickly assessed the Commonwealth Bank's plan and ran a variant of it through all of its decision-making processes, or it had some inkling of what the Commonwealth might do, which would probably be illegal under the anti-signalling provisions introduced into competition law in 2011 by the then treasurer, Wayne Swan, in frustration with a string of coincidences in the way the banks responded to Reserve Bank rate moves.

Of course, there's another possibility, a genuine coincidence. The NAB may have independently made the same tentative decision as the Commonwealth ahead of the Reserve Bank's announcement and had its announcement ready to go.

Glenn Steven's decision needs less explaining. The Reserve Bank governor could see the labour market needed a boost and that knew. Australia's ultra-low 1 per cent rate of inflation didn't stand in the way. Nor did the prospect of a boom in house prices. Although the CoreLogic data series shows home prices climbing 5.6 per cent in Sydney and and 3.5 per cent in Melbourne just the last three months, most other data series don't. The Reserve chose to believe the other series, and the data that shows home loans and real estate turnover slowing.

The Reserve has no plans to cut rates again for some time, certainly not in Glenn Stevens' time. The Governor retires next month, having overseen a tumultuous period in which he drove the cash rate up from 6 per cent to 7.25 per cent and then all the way down 1.5 per cent, a previously unheard-of low.

 

How the big banks cut

Westpac: 5.29% (cut of 0.14 points)

NAB: 5.25% (cut of 0.10 points)

ANZ: 5.25% (cut of 0.12 points)

Commonwealth: 5.22% (cut of 0.13 points)

 

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Housing no impediment as Reserve Bank prepares to cut

Apparent strong house price growth in Sydney and Melbourne is unlikely to dissuade the Reserve Bank from cutting interest rates on Tuesday, in part because it's not what it seems.

The CoreLogic home price index jumped 3.1 per cent in Sydney and 1.6 per cent in Melbourne after the Reserve Bank cut rates in May, and then a further 1.2 per cent and 0.8 per cent in June sparking fears that the Bank had ignited a new house price boom.

The jumps were inconsistent with other data showing that sales volumes and credit growth were weak.

Now Reserve Bank watchers believe they've cracked the puzzle. CoreLogic changed the way it calculated its indexes in May, adding to the apparent increases in cities whose prices had a history of rising quickly.

Until May it had removed extremely low and high prices from its index using bands defined in dollars. In May it switched to using bands defined by the top and bottom few percent of prices. Bank watchers believe the change pushed up the apparent price rises in Sydney and Melbourne, meaning the actual increases are less alarming.

If Tuesday's Reserve Bank board meeting believes this is so, it'll be left with few reasons not to cut its cash rate.

At just 1.7 and 1.3 per cent the Bank's trimmed mean and weighted index underlying measures of annual inflation are the lowest in records going back thirteen years. The headline rate is 1 per cent, well below the Bank's target of 2 to 3 per cent.

Employment is growing more slowly than new entrants to the labour force. Over the past six months employment has climbed 43,000 while the number of Australians looking for jobs has climbed 51,2000. A switch to part-time jobs means there were fewer hours worked in June than in January.

With neither inflation nor the labour market nor real estate prices an impediment, the Bank is likely to move its cash rate from 1.75 to 1.5 per cent on Tuesday, timing that will allow Governor Glenn Stevens to explain the reasons in the quarterly statement on monetary policy due out on Friday and in his final public speech to the Anika Foundation in Sydney the following Tuesday.

Governor Stevens retires on September 17 to be replaced by his deputy Philip Lowe, who is already a member of the board.

Tuesday's meeting will be the first for economic consultant Ian Harper, a former head of the Fair Pay Commission and chair of the government's competition review. He replaces a Labor appointee John Edwards who worked as an advisor to former prime minister Paul Keating.

Betting on the futures market assigns a 64 per cent probability to a cut on Tuesday, and a 100 per cent probability of a cut by November.

The Australian National University's so-called "shadow board" made up of nine market and academic economists including former Reserve Bank board member Warwick McKibbin believes the board should keep rates on hold, citing improved capacity utilisation, steady consumer and business confidence and slowly growing retail sales. It attaches an 18 per cent probability to a rate cut, up from 11 per cent last month.

Veteran RBA watcher Bill Evans said he thought the Bank was on track for a rate cut on Tuesday but that it would be a "close call".

"In my experience, when conditions are this close the better approach is to forecast what you see to be the best policy and that is another cut.," the Westpac chief economist said.

In The Age and Sydney Morning Herald

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Mortgage rates: the big four think they'll get away with it

Notice how quiet the big four banks have been since they jacked up interest rates?

Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.

Not too long ago the banks would have defended their rate rises on the radio and television to egg each other on. Here's Westpac's then retail chief, Peter Hanlon, in 2009. He had just whacked up mortgage rates by an extra 0.20 points on top of the Reserve Bank's rise of 0.25. "All the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding," he told radio 3AW 's Neil Mitchell. "All the banks are in the same boat, but they'll obviously make their own decisions."

It was known as the mating call of the banks. Discussing prices over the phone would have been illegal, so the banks communicated by radio.

And then the government outlawed that too. Anti-price-signalling legislation means they've got to stay silent and just hope each of the others takes the hint.

This time they have...

It's true that the smaller banks won't push up rates, because they're not affected by the new tougher capital requirements, but that doesn't much worry the big four. They figured out long ago that most of us don't change banks, even when we should.

The big four say they're pushing up rates because they've been forced to hold more capital. Until now the big banks have been required to hold embarrassingly little to back up their mortgages. The Murray Financial System Inquiry found that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.

Tying up more capital on each loan will necessarily mean a lower return, which ought to be OK. Each loan becomes safer. Overseas that's what happens – shareholders take a hit – but not here. Our big banks believe they can widen their margins, restore their profits and maintain their payouts to shareholders.

Former treasurer Wayne Swan used to rail against the banks for this sort of behaviour: "If you're not happy with your bank, walk down the road and get a better deal."

Swan set up a bank-switching hotline, required banks to hand over lists of direct debits to departing customers, and eventually abolished mortgage exit fees, but none of it seemed to help.

Even though the smaller banks offer lower mortgage rates and accept lower returns, we're reluctant to move to them. It's true that under the cover of the global financial crisis many of them became big banks in disguise. The Commonwealth now owns BankWest and most of Mortgage Choice. Westpac owns Rams Home Loans, St George and the Bank of Melbourne.

One of the reasons we are so reluctant to switch to the small guys is our distaste for filling in forms. Going to a new bank means proving your identity all over again. It means demonstrating spending and savings habits. It means revaluing your house, and not being too old to look like a good prospect. Those who do manage it are likely to be hunted down by their old banks' retention teams and bribed to stay with the sort of low rates that ought to have been available to all of the bank's customers.

The best way to make switching easy would be complete account number portability of the kind we have for mobile phone numbers. There's no need to re-establish your identity and no need to speak to your old provider. The new one switches everything across. A review of the idea in 2011 found the technology wasn't yet available, but it must be coming closer.

And there's another, sadder, reason we are reluctant to move. Some of us are comforted by high profits. An extraordinary survey by the Australia Institute finds that one in five of the big banks' customers think high profits made them safer. They are begging to be fleeced.

We're our own worst enemies, and the big banks know it.

In The Age and Sydney Morning Herald

 

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Westpac and the Commonwealth protect mortgage profits no matter what

If the Commonwealth Bank and Westpac had been located anywhere else, they wouldn't have pushed up rates.

The Australian Prudential Regulation Authority has imposed tough new capital requirements that will require each of the big banks to back up their housing loans with more cash.

In the United States and elsewhere where this has happened the banks' shareholders simply accepted lower returns. More capital made the banks safer, less deserving of an outsized return to compensate for risk.

Not here. Westpac and the Commonwealth seem to believe their shareholders are entitled to outsized returns no matter what.

Westpac's return on shareholder funds is an astonishing 15.8 per cent. The Commonwealth's is even higher - 18.2 per cent.

In the United States, Morgan Stanley, run by Australian James Gorman, accepts high single-digit returns. In Australia recently he said investors around the world were becoming more comfortable with idea of banks holding more capital in exchange for lower earnings.

As recently as two months ago the head of the Commonwealth Bank, Ian Narev, said the same thing. "As you carry a bit more capital and wear a bit more costs, you are going to get a moderate decline in profitability," he told shareholders...

And perhaps to increase them. The best guess within official circles is that if the banks insisted on merely maintaining their profits they would have had to add the equivalent of 0.10 percentage points to the price of each loan. Because (so far) they are raising rates only on mortgages and not on business loans they would probably have to recoup a bit more from each mortgage, although not as much as 0.15 percentage points.

Westpac is lifting its variable mortgage rates by 0.20 points, the Commonwealth by 0.15 points. They are doing it in a year in which their other costs of borrowing have fallen.

The only thing that will make them think twice is losing business. The smaller banks aren't threatened with the same higher costs. They already heavily back their loans. They are in an excellent position to steal Commonwealth and Westpac customers.

The Commonwealth and Westpac think we're too lazy to make the switch.

In The Age and Sydney Morning Herald

 

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Free advice for the ANZ: Eviscerate your competition

This Friday

Here’s some free advice for the ANZ. Eviscerate your competition when you meet to set mortgage rates Friday. Make their Christmas hell.

The National Australia Bank is extraordinarily vulnerable.

Positioning itself as the consumer’s friend, it has guaranteed to offer the lowest standard variable mortgage rate of the big four all year.

But it went out on a limb on Wednesday passing on only 0.20 points of the Reserve Bank’s 0.25 point cut, doubtless expecting the other banks to follow. Westpac and the Commonwealth did.

But the ANZ sets rates on a different cycle, considering such questions only on the second Friday of each month, giving it time to think.

It has the opportunity to break from the pack (a bit) by cutting 0.22 points.

NAB would be blindsided. The cut would take the ANZ rate to 6.38 per cent, exactly the same as NAB’s.

In order to fulfil the terms of its pledge to offer the lowest rate NAB would have to cut again, embarrassing itself by implicitly admitting it sold its customers short last week.

The ANZ would steal the mantle of innovator from the NAB, gain much needed mortgage customers and put beyond doubt that at least one of the banks was prepared to compete on price.

Importantly the opportunity is a once-off. The NAB’s pledge expires at the end of this year. It’s made itself a soft target for one month only. If I was running the ANZ I would take aim.

In today's Sydney Morning Herald and Age

Memo item

Westpac from 6.71% to 6.51%
Commonwealth from 6.60% to 6.40%
NAB from 6.58% to 6.38%
ANZ from 6.60% to...



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Read more >>

Reserve: The big four can pass it on, and if we have to we'll cut again

Me on ABC 891, December 5, 2012

11 minutes, play or CLICK THEN CLICK AGAIN to download mp3

Australia’s big four banks are in a excellent position to pass on all of its latest 0.25 point rate cut, Reserve Bank calculations show.

Each of the big four sat on its hands Tuesday rather than immediately respond as they once used to, leaving it the smaller Bank of Queensland, which passed on 0.20 points and ING Direct, which passed on all 0.25 points.

The prime minister, treasurer and shadow treasurer Joe Hockey all implored the banks to pass on the cut in full, Mr Hockey qualifying his appeal by saying that if they did not cut in full they should give their customers a complete explanation of the reasons why.

The Reserve Bank calculations show the banks in a better cost position than they were in October when the Commonwealth, ANZ and National Australia banks passed on only 0.20 points of its 0.25 point cut and Westpac only 0.18 points.

Reserve Bank governor Glenn Stevens said in a statement released with the rates decision that Australian banks had “no difficulty accessing funding, including on an unsecured basis”.

Treasurer Wayne Swan said while ING Direct had done the right thing by its customers, the other banks had not.

Prime Minister Gillard said with Christmas approaching the big four “should take into account that Australian families will be looking to them to pass the interest rate reduction on in full”.

If fully passed on the cut would slice a further $47 from the monthly cost of servicing a $300,000 mortgage, bringing the total saving since the cuts began last November to $270 per month.

The Bank board cut rates because of signs the business investment outlook is weakening, not only in mining but also in the non mining economy... It pays close attention to the National Australia Bank survey of business confidence which shows business conditions their weakest in three years. It wants to strengthen other parts of the economy in order to take up the slack as the mining investment boom passes.

If necessary it will cut rates again in order to sustain economic growth, restrained only by its inflation target. Late Tuesday the futures market assigned a 67 per cent probability to a further cut of 0.25 points at the board’s next meeting in February.

The board does not believe it has cut rates to “emergency levels”.

Mr Hockey said Tuesday the Bank was “trying to catch a falling Australian economy. It had “dropped rates to emergency levels, not because the economy is doing well but because it is facing huge challenges”.

The cut from 3.25 per cent to 3.00 per cent brings the Bank’s cash rate to the low point reached at the trough of the 2009 global financial crisis.

But unlike during the financial crisis it has not been brought there by a series of dramatic, unprecedentedly large cuts. Unlike during the global financial crisis it has not be accompanied by a dramatic boost in government spending. Unlike during the financial crisis it has not been accompanied by an unusally low Australian dollar but by a near-record high dollar.

“Anybody who would go out there and describe rates now in the same context that they were at the height of the global financial crisis is simply unqualified for high office,” Mr Swan said.

“We are having an attempt to sensationalise this rate cut, not just by the Liberal opposition, but elements of the media. Anyone who can't welcome a cut as such good news for families and business is somebody who is just being negative about everything.”

In today's Canberra Times, Sydney Morning Herald and Age


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

MARK UP

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






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