Confused by the claims and counter-arguments over our banks and their need, or desire, to raise their interest rates?
Fear not, dear reader, for you are not alone. If ever there was a fit for that old adage ''lies, damned lies and statistics'', the argument over our banks fits the bill.
Once again, the big four are pulling out the big guns to soften up the market before the Reserve Bank's monthly meeting next Tuesday.
After the unseemly delay in passing on the 0.25 percentage point cut last month, it is clear the banks are determined for a showdown this time around, regardless of whether or not the Reserve Bank of Australia cuts official interest rates.
For despite all their protestations, and their claims of the rising cost of funds, the simple fact is that our banks are in rude good health and are more concerned about protecting record profits than they are about ensuring their survival.
Don't take my word for it. If you require any proof, then simply log on to the Reserve Bank website, head to the page that says ''Chart Pack'' and then scroll down to the page that says ''Bank Funding''.*
What unfolds on the single graph on that page totally undermines the argument from the banks that they are in desperate need to jack up rates.
The story to be garnered from that graph is that our banks are in a far superior position than during the first round of the financial crisis in 2008.
It is a story of how they have evolved to insulate themselves, or at least minimise the impact, from a repeat performance of those dark days should the crisis in Europe escalate and credit markets again seize up.
Remember, too, that since 2008, our banks have added the equivalent of five official rate rises either by not passing on cuts or by increasing rates beyond official rate rises.
First, a bit of background. There is no disputing that the cost of raising money from offshore markets has risen as the European debt crisis has deepened.
But here is what the banks are not telling you. They don't rely on offshore markets to anywhere near the extent they did back in 2007. They are more geared now to domestic markets and to longer-term debt, making them less susceptible to sudden movements on wholesale funding markets.
What caught them out back then was short-term foreign debt, a type of financing from which they have since aggressively switched away. Banking is an inherently risky business. Banks borrow cash on a short-term basis - between one and five years - and then lend it to retail customers and businesses for periods of up to 25 or even 30 years.
That disconnect creates the risk, placing them at the whims of global financial markets.
Before deregulation in 1983, our banks relied almost exclusively on domestic deposits. They merely lent the money Australians gave them to other Australians.
In the late 1980s, however, they took a quantum leap in the risk department when they began accessing cheap offshore finance, which they pumped into mortgage lending, fuelling a decades-long real-estate boom. Smaller banks and non-bank financiers jumped on the bandwagon.
That all ground to a halt in 2008 when those offshore markets froze, crippling non-bank lenders such as Rams and allowing the big four to gobble up the opposition.
Right now, the big four are preying on the fears of another meltdown in global finance, arguing the case they should raise rates once again to ''protect their margins''.
Even if you put aside the obvious - that profits from the big four banks have soared in the past three years - that Reserve Bank graph tells you all you need to know about just how much our banks have ring-fenced themselves from a potential global catastrophe.
Our banks no longer rely on offshore markets to the same extent. More than half their funds come from domestic retail deposits, up from less than 40 per cent in 2007.
The amount of cash they borrow short-term also has slumped from about 32 per cent in 2007 to under 20 per cent now. Longer-term debt has risen markedly during that time.
The data for that Reserve Bank graph is now more than a month old. In the past few weeks, the Commonwealth Bank and Westpac have tapped domestic investors for more than $6.5 billion in longer-term funding, tipping the balance even further in the banks' favour. Mind you, those raisings were expensive. But the amount they raised was a drop in the ocean to the more than $1000 billion they have outstanding.
To argue they need to charge all their new and existing customers more on total loans because they had to pay more for a fraction of their new funding costs is more than a little rich. It's downright insulting.
Bear in mind, too, that it only takes a bank two years to recoup administrative and marketing costs on new loans. After that, there is no work, just profit.
But if mortgage holders have felt ruffled by the recent behaviour of our banks, spare a thought for the treatment meted out to small and medium-size businesses. Slugged far harder than homeowners, they don't have the political clout of the mortgage belt and don't grab the headlines, despite the important role they play in employment.
If you read between the lines - in reports published by the banks and in the business press - you'll get a better idea of the real reasons behind the latest push to plump up the margins between borrowing and lending rates. Rather than worrying about borrowing costs, it is the simple fact there is less demand for loans. Australian consumers and corporates are borrowing less and saving more.
That may be cause for applause from those looking at the economic big picture. But for a bank, in the business of lending money, it is a red flag, the kind of trend that could threaten another year of record profits. The easy solution? Widen the profit margin.
* www.rba.gov.au/chart-pack/banking-indicators.html
32 comments
More comments
Comments are now closed