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The big banks take with one hand - and the other

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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.

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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.

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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.

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.

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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

147 comments

  • Unlike other companies, such as the mining sector who dig their profits out of the ground. The so called big four banks dig their profits from our pockets.
    Sinice they have basically told the Reserve Bank, screw you, we will do what we want in regards to interest rates, I see little reason for the banking sector to be regulated or protected by the Reserve Bank.
    De-regulate the market, and let in cashed up forign banks.
    Lets see how they (the big four) cope with some real competition.

    BTW I have switched my loans from West Pac to a non Big Four Bank. and happy about it.

    Commenter
    Aussieman
    Date and time
    October 04, 2012, 7:04AM
    • Needs to be a super profits tax for banks.

      Commenter
      Greedy
      Date and time
      October 04, 2012, 7:24AM
    • I think your idea of deregulating the Australian banking system is fraught with danger. are you not aware of the financial turmoil in Europe and USA, thanks to questionable banking practices?

      Commenter
      stephen
      Location
      yarraville
      Date and time
      October 04, 2012, 7:25AM
    • For gods sakes don't forget the oil companies who appear to have drivers savings and credit cards hooked up to a reverse drip feed.

      Commenter
      J. Fraser
      Location
      Queensland
      Date and time
      October 04, 2012, 7:38AM
    • Banks sell banking services, of course they are different to the mining sector. Just because something isn´t directly tangible in your hand, doesn´t mean it has no value.

      I think you may need to learn a little more about what regulation of the banking sector involves, since your comment suggests you have no idea, and even less so about the consequences of complete de-regulation.

      Commenter
      bob
      Date and time
      October 04, 2012, 7:40AM
    • I agree Aussieman with your assessment. Don't think for one minute it was the banking framework and regulation that saved the Aussie banks from failure during the GFC. If they didn't receive billions in funding from the US Federal Reserve, the Big 4 would now be Big 2 and we would now be writing about how the banks were able to exploit regulation loopholes and aggressively trade in global financial markets despite our so-called tough regulation.

      If they want to continue trading in the derivative, currency, bond, stock and commodity markets, let them do so without the current safety net in place.

      Commenter
      James
      Location
      Melbourne
      Date and time
      October 04, 2012, 8:16AM
    • I am not a bank employee although I have been in the past. This in itself gives me some credibility to comment. Before the GFC I used to bemoan the amount of regulation that tied up my day, the amount of compliance I had to adhere to, the delays these things caused in servicing our clients and overall what I felt was too much government intervention in business. Post GFC I will be forever thankful that our governments in years past had the foresight to impose strict regulation on our banking industry. At one point after the GFC Australia had 5 banks out of 14 in the world who had retained their high credit rating. That is am amazing statistic. To suggest for one moment we should totally deregulate and allow cowboy financiers a free run of our market is not only irresponsible it is just this side of stupid. And, yes banks make profits from their customers. Shock horror! Should they really lend money at no profit? I am VERY happy we have profitable banks in this country, the alternative doesn't bear thinking about. And finally, the cost of funding is very high these days, the times of unlimited investment in this country from overseas is gone for now and there is literally not enough money out there to meet credit demand. The cost of securing funding from overseas is much higher. We cannot look at the Australian cash rate and equate it to what banks are paying for off shore funding. It would be like buying fuel from overseas and expecting it to cost the same as it does here! Most people have overly simplistic ideas about what banks do and as such make uninformed comments.

      Commenter
      No understanding
      Location
      Brisbane
      Date and time
      October 04, 2012, 8:23AM
    • Couldn't agree with you more Aussieman. I was very surprised with the poll results...You dont have to like it but its true. These ARE Sharehlder driven Banks with a promise to make as much profit as possible in order to give back to those who have invested in them. They are NOT Not-For-Profit organsisations. I am also very sick of hearing people winge about how slow they are in passing on the cuts to interest rate.....for goodness sake, are we that much of a lazy society that all we do is winge and not act. JUST CHANGE BANKS and watch them change their attitudes. We have a multitude of other banks/credit unions that are much quicker at taking on the cut rates and much slower in passing on higher rates; give great loans and willing to do business if you just get of your "a$$" and SWITCH. I have not been with a major 4 Bank in 15 years and loving it. Cheers to all those lazy buggers who dont teach the Big 4 that enough is enough.

      Commenter
      Justce
      Date and time
      October 04, 2012, 8:25AM
    • I fully agree with your comments. No problem having a bit of real competition in Australia from foreign banks. I think they have learnt so much since the GFC lending practises would be far more considered than in the past.

      Commenter
      bob blackmore
      Location
      manly
      Date and time
      October 04, 2012, 8:29AM
    • I don't have a problem with banks making a profit. What I have a problem with is them constantly whinging that the cost of lending is hurting them while at the same time they are recording record profits every period. When was the last time you saw a bank decrease the intrest rate by more than the reserve bank because things were going well?

      Commenter
      ozcurly1
      Date and time
      October 04, 2012, 8:34AM

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