Over the last 16 months, the Reserve Bank of Australia (RBA) has continued to lower the cash rate, with the rate now at 3 per cent – 1.75 percentage points below what it was in November 2011. However, the big four banks have failed to keep pace, quoting ‘high funding costs’ as the reason.
A former central banker in India, and now a professor of banking and finance at the University of Canberra, Professor Saythe has poured cold water on claims by the banks that high funding costs are the reason they are holding back on rate-cuts. The three main sources of bank funding – deposits, long-term debt and short-term debt, have actually become cheaper over recent years, despite what the banks are claiming.
Banks have, in general, passed on just 1.36 of the 1.75 percentage points reduction in the cash rate, pocketing the rest. During this time the banks have also cut the rate of interest paid on savings, but not by as much as the RBA’s cash rate reduction. Since 2008 the bank interest paid on savings has reduced by 3.7 per cent, with the RBA cash rate falling by 4.25 per cent. So while savers may not have been hit as hard as borrowers, the banks have still profited as the interest paid is less than what the banks charge overall.
The banks are now making more money from mortgages than ever before, according to a report from UBS Investment Research. The report stated that while the major banks are currently in a purple patch, they risked government intervention if they did not start cutting their mortgage rates outside the RBA cycle.
“The majors continue to make record profits and at the same time harp on about high funding costs to justify their higher lending rates,” Professor Sathye said. Of the sharemarket profit currently being enjoyed by Australian banks he said that it “is coming out of the pocket of somebody… and that somebody is the Australian borrower.”
Read the full story at TheAge.com.au
Hands up anyone who believed the bleating of the big four banks that funding costs were the reason they didn’t reduce mortgage rates at the same level as the RBA cash rate? No, neither did I. But what will it take for someone to force the banks to come clean and do what’s fair for Australian borrowers and savers?
For the last few years Australian banks have continued to flourish, with profit margins reaching new levels and shareholders laughing all the way to… well, the bank. But what about ordinary Australians who, despite the RBA cutting the cash rate, still struggle to meet their monthly mortgage payments and have seen their meagre savings all but obliterated? Who cares about them? No one it seems.
I do not believe that the release of the report by UBS Investment Research and the analysis by Professor Sathye is the first time that the Government has been alerted to the ‘funding cost’ rort which is being perpetrated by the big banks. The biggest threat to bank profits is a blow-out in operating costs, one which the banks counter by sending jobs overseas, where the employment market is more competitively priced. So if the banks are showing no loyalty to the Australian public, why are they being protected by our Government?
This is a Government which only last week rushed legislation through Parliament to enable it to make a grab for money held in savings accounts which have been inactive for three years. Yet it can’t see the need to introduce legislation which will force the banks to follow the lead of the RBA, which surely should be the leading authority in banking policy?
With so many Australians being slaves to the banks, whether in the form of a mortgage, savings account or simply a means to have salary or benefits deposited, it’s about time we do something to redress the balance. Rather than waiting for a Government to fight on our behalf, it’s time to make the switch to a smaller, more competitive bank and leave the big four wondering what has hit them.
Are you happy with your bank or would you consider switching? Is it the Government’s role to step in and stop the banking rort?