When the Financial System Inquiry recommended in December 2014 that capital ratios for deposit-taking institutions be increased so that they became "unquestionably strong", inquiry chairman David Murray ventured that customers should not have pay for this prudential measure. Safer, better capitalised banks, so Mr Murray's thinking went, would benefit from a lower cost of capital, meaning the exercise might be cost neutral, or these savings might be passed on to customers. It's assumed borrowers and lenders both. That's not how it's turned out in practice. Days before the Turnbull government's announcement this week that it would accept this and most of the inquiry's other recommendations, Westpac announced its mortgage interest rates were rising by 20 basis points to cover the costs of new capital requirements. The Commonwealth Bank followed suit on Thursday, followed by the ANZ and National Australia Bank a day later. Deposit rates have remained unchanged.
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Treasurer Scott Morrison's reaction to the banks' cost-recovery tactic was not what might have been expected given Mr Murray's observation. And it's a marked departure from the righteous indignation that treasurers have manifested in past whenever banks have lifted rates unilaterally or beyond official interest rate increases. "That is entirely a matter for them to explain to their customers about why they're doing this." Mr Morrison said. "At the end of the day, customers can choose where they want to bank and shop and buy their milk."
Mr Morrison's serenity has been attributed to a number of factors: increased bank profits will deliver more revenue to Treasury coffers, the hikes will help cool the worryingly overheated Sydney and Melbourne property markets, and the strong likelihood the Reserve Bank will drop official cash rates on November 3, neutralising the effects of this week's unilateral rate hikes. Of course, the third scenario rests on the banks' willingness to respond accordingly to any moves by the RBA, which is not guaranteed.
The ethics of the banks' ruthless commitment to maintaining profit margins which are among the fattest in the world – regardless of commercial or regulatory circumstances – has been debated to the point of exhaustion over the years. Bank boards, it's true, have duty to maximise shareholder return and return on capital. But Australia's uniquely configured banking landscape, which is largely an outcome of close political intervention, has enabled the big four to act more or less as an oligopoly. Big four customers can take their business elsewhere, as Mr Morrison points out, but with so few real alternatives on offer, the potential for correcting lackadaisical management attitudes or securing a better mortgage deal is not great.
Mortgage and business loan customers are sometimes reminded that Australia's financial institutions are among the world's most robust, and that this is a result of prudent and far-sighted bank management. But banks have also been the beneficiaries of taxpayer-funded support, most notably during the GFC when the Rudd government guaranteed all of the banks' borrowings and deposits. With additional prudential measures now being implemented – the more cynical have likened the exercise to the gold-plating of the banking system – bank customers are once again having to bear most of the cost. This outcome clearly underlines the oligopolistic nature of Australian banking.
Mortgage rates have declined from 7.1 per cent to 4.7 per cent over the past five years, a fact which will help reduce the sting for many borrowers of this latest rise. Nor is the RBA or the Australian Prudential Regulation Authority likely to be fussed as both have been keen to see the investor-led boom in Sydney and Melbourne house prices slow down. With auction clearance rates in those cities already falling, and forecasts that house prices there will not rise as fast as previously, the Reserve Bank board will not want to buoy sentiment by reducing the cash rate when it meets on Melbourne Cup Day.
To the extent that winners from this episode of bank profit-shoring outnumber losers, criticism is likely to be short-lived. The RBA and APRA are content, the government can pretend its hands are tied regarding the way banks do business, and home borrowers can take comfort from the knowledge that mortgage rates remain at historic lows. Indeed, were it not for the banks have probably further hindered the ability of young people to get a foot in the home-ownership door, their actions might be thought timely.
