Australia’s two biggest banks, the Commonwealth Bank and Westpac, announced that the rate cut on their mortgage interest rates wouldn’t take effect until 20 February, 17 days after the official Reserve Bank of Australia (RBA) decision. Several smaller banks including HSBC, ING Direct and ME Bank have followed in kind by announcing similar delays in passing on the rate cut. Bank of Queensland, the first bank to announce its move, is waiting until 24 February to pass on the rate cut.
The last two RBA rate cuts saw the Commonwealth Bank pass on the reduction to customers eight days after the official decision in August 2013 and six days in May 2013. Westpac were a little slower on both occasions taking 13 days to pass on the cuts.
A 2012 study published in the Economic Record found that over the past two decades, Australian banks were quicker to pass on rate rises than to pass on rate cuts. Analysis by JPMorgan has found that major Australian banks earn around $2 million for every day that they hold back a rate cut of 0.25 per cent.
Treasurer Joe Hockey yesterday urged the big four banks to pass on the RBA rate cut to all customers “I say again to the Australian banks, pass it on in full now, not just to home owners, but, importantly, small business and credit cards as well,”.
A large number of Australia’s biggest banks have shown their true colours this week by pushing back the passing on of the rate cuts until 17 days after the RBA decision, in order to gouge extra revenue from customers.
There is no justifiable reason for the banks to withhold the RBA rate cut any longer than the previous two instances, yet, we have seen Australia’s two biggest banks do just that. It’s not a surprise to see the smaller banks follow suite. If you ran a petrol station and your main competitor lifted his price from $1.20 per litre to $1.55 per litre, it would only make sense to follow in turn and increase your own profits by following those around you.
The banking sector is focused on one goal – increasing profits – irrespective of the cost to their customers. When the RBA cuts the official interest rate, as they did this week, the banks are not held to account to pass on these reduced rates, and if they do, they can do it on their own time – such as what we are seeing with the current delay. There is no foreseeable legislative change anytime soon. It seems that for reasonable and enforceable action to be reached, it will take another Global Financial Crisis (GFC). If the banks require federal government support (eg: credit guarantees), such as they did during the last GFC, the government will have the leverage and the ability to apply effective pressure on the banks to do the right thing by their customers.
What do you think? Does the Australian banking sector need a shake up? What should we do about the banks refusal to pass on official rate cuts in a timely manner?