Wednesday, April 8, 2009

Banks Are Squeezing Every Last Drop Out Of Interest Rates

Yesterday’s decision by the Reserve Bank of Australia to cut official interest rates by 0.25% was immediately welcomed by the big banks with a massive round of doing pretty much nothing. Some passed on a small portion of the reduction, while others passed on none at all, keeping the entire rate cut for themselves. The banks argue that despite the official rate coming down, the actual cost of funds to them is still high because of international conditions. While that is true, our banks continue to be among the most stable and profitable in the world and are in a position to pass on at least a fair share of the saving. But that’s only part of the story.

While much of the focus is on mortgage rates, and of course they are an important indicator for the economy, the impact on business lending is being overlooked. Banks have been reluctant to pass on interest rate cuts to business borrowers, and indeed have actually re-rated business loans for increased risk due to the economic contraction. The conundrum there of course is that by charging businesses more for finance they actually contribute to increasing the risk that those businesses may become no longer viable.

Looking at the big picture, failure to facilitate business lending actually contributes to making the economic climate worse, and if credit dries up enough it could get to the point where banks themselves begin to suffer. While that might sound like poetic justice, it would further contribute to the damage to the economy. The truth is that our banks remain sound, and that is at least in part thanks to the government guarantee of bank deposits. For that reason, as well as for the benefit of the broader economy, banks have a responsibility to maintain the supply of credit to working businesses in general, and to do so at rates of interest which will help those businesses to remain afloat.

There is also another lending sector which is being completely ignored when it comes to interest rate relief. Credit cards. Some credit card customers are paying more than 20% per annum for their credit card balances at a time when the official cash rate is now 3%. If that’s not highway robbery, I don’t know what is. Admittedly there are lenders including the big banks who do offer cheaper credit card rates at around 11% or 12%, but you have to wonder why they are allowed to get away with charging some of the higher rates that are still being imposed.

Credit card interest rates are also important to the economy because higher rates undermine consumer spending power at a time when policy makers want to encourage consumers to start spending and thus kick start the economy. Banks claim that credit cards are unsecured debt and therefore represent a higher risk, and that’s true, but much of the risk management hangs on how the banks decide to whom to issue cards in the first place and what conditions, limits and restrictions to impose. The reality is that the banks are still using credit cards as a magic money machine, and if the credit risk really was that high we would have already seen many more people actually defaulting on their cards.

While we can be thankful that our banks are sound and profitable, meaning that they are in a position to help keep the economy moving, it would be nice if those banks were themselves more thankful to the people who helped to make them so profitable in the first place: their customers.

1 comment:

Anonymous said...

Simple solution, any Bank that has not passed on ALL the rate reductions loses their deposit guarantee.
No arguments!