Leadership lying about bank interest rates
Michael Pascoe thinks RBA cuts should not be passed on - and our leaders know it. These are dismal days for Australian politics on a number of fronts. A quick example is that the Prime Minister, Treasurer, Opposition Leader and Shadow Treasurer apparently have no idea of how the Australian financial system works - or are happy to routinely mislead and lie. As predictable as stories about Christmas "killer toys", the pollies fell over themselves to declare the banks should pass on the latest Reserve Bank's interest rate cuts in full.
"They never learn. They honestly never learn and it's disappointing," said Prime Minister Scott Morrison, indicating either he's never known, or worse. The banks were putting profits before customers, former banker Josh Frydenberg proclaimed, faking outrage. The government shouldn't let the banks get away with it, rabbitted Anthony Albanese, the way opposition leaders do, without suggesting exactly how the government was supposed to regulate lending rates.
The politicians - and plenty of media commentators - seem to enjoy perpetuating the illusion that the banks' funding is set by the RBA's cash rate. It is not. The pollies and sundry ratbags give the impression that, if the RBA cuts its cash rate by 50 points, the cost of money to the banks will be 50 points cheaper and therefore the banks should lend money 50 points cheaper - "passing the cut on in full". The real world isn't like that.
The RBA nudges banks' interest rates by the price at which it will lend to or accept deposits from the banks on their overnight exchange settlement accounts. The central bank provides a description of the mechanism here. But that's not how the banks fund their loan books. The RBA isn't in the business of holus-bolus bank funding - or at least not yet while "unconventional" monetary policy remains only a possibility for us. As this RBA graph shows, most of the money banks lend comes from domestic depositors. That's a desirable thing, as we discovered during the GFC when foreign borrowings made up a bigger percentage of funding and threatened to be flighty.
With deposit rates already miserably low, there's a limit to how much further the banks can cut them and expect depositors to keep depositing. Some countries are having to deal with the disruption of negative interest rates, of charging customers to leave money in banks, but we don't want to go there if we can avoid it.
The proof that the banks are not "profiteering" from the RBA cuts is in what's happening to their net interest margin the difference in their price of borrowing and lending. As you can see from another RBA graph, the NIM has been coming down over the years as competition has applied some pressure. Yes, there is competition in banking - maybe not as much as some people might want, but it's real. The NIM tends to get an extra squeeze when the RBA cuts its cash rate. Banks make more money when rates rise a bit, not when rates fall.