Banks win both ways
New research reveals banks are padding their interest rate margins no matter if the Reserve banks lifts or lowers official rates.PT0M0S 620 349
AUSTRALIAN banks have form when it comes to failing to pass on rate cuts in full and over-egging rate rises.
A study in the prestigious Economic Record has found 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 Australian banks have on average 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 rises.
Separate research being conducted by 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.
Illustration: Ron Tandberg.
''For instance, the Commonwealth Bank has charged an average of 7.47 per cent since the crisis, 7.13 before,'' Professor Valadkhani said. ''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 the ''least friendly'', with an average mark up over the cash rate of 3.52 percentage points, while the National Australia Bank became 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 said that even as rates diverged there was substantial evidence of co-ordination. ''By co-ordination I do not necessarily mean they
they talked to each other. They might have independent decisions to copy each other.''
Each of the big four yesterday left mortgage rates unchanged for the second day since the Reserve Bank's 0.25-point rate cut.
Analysts believe they will pass along most of the cut, but the wait may drag on until next week.
The major banks have taken an average of 10.6 days to pass on rate cuts following RBA reductions beginning in November 2011, but have raised rates on average after only 6.8 days, according to calculations by The Age.
''The banks were very keen to raise rates quickly when the RBA was putting them up,'' said David Richardson, senior research fellow at The Australia Institute, which calculated the figure.
''Every day they delay is over $6.2 million that feeds directly into their bottom line.'' Any economist ''should be outraged at the blatant example of monopolistic competition in Australia'', he said.
Analysts believe the banks could wait until Friday next week, when ANZ, pursuing its go-it-alone rate announcement strategy, is expected to reveal any changes to its mortgage rates.
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's 7.30. He said the price they were paying for term deposits was high. ''That suggests it is difficult for them to pass [the cut] on in full.''
With Chris Zappone