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.