Paul Clitheroe

Money Magazine Australia - - CONTENTS - Paul Clitheroe

It is not too of­ten I feel a twinge of sym­pa­thy for our banks and their well­paid ex­ec­u­tives but the lat­est bout of bank bash­ing must make them won­der how they will ever win any pub­lic sym­pa­thy. Iron­i­cally, even if they de­cide to give us what we seem to want – low mort­gage rates, high de­posit rates, lower fees (in par­tic­u­lar the out­ra­geous rates on credit cards) and fi­nan­cial strength to meet the next cri­sis – the out­cry will be just as bad.

About 13 mil­lion of us have su­per and close to half of us own bank shares in our own names or that of a fam­ily trust or com­pany. So one way or an­other, pretty much ev­ery­one has ben­e­fited from the big in­crease in bank share prices and juicy div­i­dends over the past cou­ple of decades.

You know where this is go­ing. If banks re­spond to the out­cry and pass on all a Re­serve Bank rate cut, keep de­posit rates up for those with bank sav­ings, in par­tic­u­lar re­tirees, cut those hor­ri­bly high credit card rates, all while build­ing up their re­serves for the next cri­sis, guess what? Div­i­dends would have to drop big time. So mil­lions of us would see fall­ing bank share prices and lower div­i­dends. The re­sult would be pub­lic and me­dia out­rage, which politi­cians would re­spond to in the usual way, with a prom­ise to “hold banks to ac­count” with some form of in­quiry.

For heaven’s sake! Banks drive us all nuts at times, not to men­tion treat peo­ple un­fairly. But when we all want dif­fer­ent things we con­sumers are al­ways go­ing to be un­happy. In the past, I had a big mort­gage, no bank shares and lit­tle su­per. I did not care if the banks made no money and paid no div­i­dends; I just wanted my mort­gage rate to be as low as pos­si­ble. Now I have bank shares, a fair bit of su­per, a bit of money in the bank and no mort­gage. So I want the bank to make lots of money, which it pays to me in div­i­dends. That, of course, means it needs to make prof­its via high mort­gage rates, high credit card in­ter­est and low in­ter­est for savers.

So what would you do as a bank CEO or board mem­ber? Well, I would think they’ll try to ag­gra­vate the small­est num­ber of peo­ple. But it is pretty ob­vi­ous that the big­gest co­hort is those (like me) who do bet­ter when the bank makes prof­its and pays most of this profit out in div­i­dends.

It seems bank CEOs will be called be­fore a gov­ern­ment hear­ing each year to jus­tify their be­hav­iour. This should be hi­lar­i­ous. I can give you the script in ad­vance.

The meet­ing will start out along the lines of: “You have been a very bad bank fail­ing to pass on rate cuts in full.” The an­swer, of course, is: “Well, yes, but we are very con­scious of our re­spon­si­bil­ity to all our cus­tomers and more broadly the com­mu­nity by en­sur­ing we are fi­nan­cially strong, mean­ing we need to build re­serves. We are all also very con­scious of our re­spon­si­bil­ity to re­tirees and those with sav­ings, so we share a rate cut amongst bor­row­ers and savers.”

No doubt the in­quiry will scratch their col­lec­tive heads for a while, re­al­is­ing this is a per­fectly de­cent an­swer and go with “but you are still a bad bank as you made many bil­lions last year”. The an­swer to this pro­duces an­other dilemma for the in­quiry. “Yes, we did make bil­lions. A small part of this we use to build our fi­nan­cial strength as we are re­quired to do [bit of a smile here from the bank CEO, pos­si­bly a smirk] by gov­ern­ment reg­u­la­tion. We also paid out some 70%-plus of this profit to the mil­lions of peo­ple in su­per funds and those who own bank shares to build wealth for the fu­ture. This also al­lows peo­ple to have in­come so they are less de­pen­dent, or not de­pen­dent at all, on the tax­payer when they re­tire.”

The banks may well say: “What would you like us to do?” To keep it nice and sim­ple, they could give a few sim­ple choices. Hav­ing a strong bank­ing sys­tem is non-ne­go­tiable, so build­ing fi­nan­cial strength is a given. The broad choices are:

1. Pass on in full all rate cuts, lower in­ter­est rates on de­posits and cut div­i­dends.

2. Pass on in full all rate cuts, keep in­ter­est rates up and cut div­i­dends more.

3. Go with the cur­rent plan to pass on part of rate cuts, keep de­posits at a rea­son­able rate of in­ter­est and main­tain div­i­dends at a rea­son­able level.

A well-known, now-re­tired politi­cian said to me some years ago as he was be­ing booed over a pol­icy an­nounce­ment that up­set a small vested in­ter­est group: “Oh well, as long as only 49% of vot­ers hate me, it is fine.” Maybe that is life for a bank.

Paul Clitheroe is Money’s chair­man and chief com­men­ta­tor. He is also chair­man of the Aus­tralian gov­ern­ment’s Fi­nan­cial Lit­er­acy Board and a best-sell­ing author.

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