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Thursday, 25 August 1994
Page: 371

Senator KERNOT —My question is directed to the Minister representing the Treasurer. I refer the minister to the 1994 Reserve Bank annual report. The report notes that the margins on variable rate home lending are `especially attractive' to banks, and that competition `so far has done little to whittle away these high returns'. Translated, I think that means that ordinary Australians are paying too much for home loans. The report goes on to say:

Interestingly, most banks have set and held similar rates on these loans.

If such a coincidence of pricing occurred in other industries, would it not be regarded as a little suspicious? Would the minister say that the Reserve Bank report has identified what could only be described as a market failure in the housing loan market? What is the government planning to do to back up the Prime Minister's call to the banks to absorb most of the interest rate rise in their margins?

Senator COOK —I thank Senator Kernot for a fair question, although I think it is a question that would repay a little more detailed reading of the Reserve Bank's annual report, with due respect to Senator Kernot. It happens that I do have some notes from the Treasurer on this very subject. Perhaps I should turn to them.

  To get a representative picture of banks' overall margins, it is necessary to look at average interest rates received and paid. It is not sufficient simply to subtract a deposit rate from a lending rate, as this does not take into account the long duration of loans and deposits. The figures quoted on new deposits, for example, do not reflect what a bank is still paying on its longstanding deposits which are often fixed at higher rates. A better measure is the banks' domestic interest rate spread. This is the difference between the average interest rate received on all loans and investments, including non-accrual loans, and the average interest rate paid on deposits, including non-interest bearing accounts.

  The Reserve Bank's annual report notes that there has been a slight downward trend in the margin between the average interest rate charged for loans and the average interest rate paid on deposits. That is a finding in the Reserve Bank's annual report that is supported by several other such examinations since 1990.

  The other factors in this consideration should be that all the banks, fairly uniformly, suffered a sharp fall in profits over the 1990s, badly affecting their shareholders. As well, housing rates in Australia are now at their lowest for many years, and obviously customers have clearly benefited from that. Housing rates have not moved upwards since the change in the cash rate of last week, so housing rates still are at the same levels as they were before.

  The next point I should make is that it is difficult to make accurate comparisons between banks' margins in Australia and those overseas, given the limited data and widely differing financial systems. Allowing for those differences, if we do make a best analysis of how we perform in our banking system compared to other countries, Australia comes in the middle of a comparative group of other countries.

  The extent to which domestic margins are higher than overseas margins for Australian banks reflects in part the higher cost structure for Australian banks. One of the factors that that is due to is the extensive branch network over the massive geographical land mass that they have to retain in Australia. I must also point out that all major banks are currently restructuring to reduce costs and improve efficiencies.

  The Australian banking system is highly competitive, as indicated by various fee free or low fee offers that they make, as indicated by new products on offer to bank customers themselves. I think that is going to be underpinned to some extent by the entry of foreign banks as well. In addition, by ensuring that banks disclose the terms and conditions to customers when they make their banking decisions, the code of banking practice will operate to increase competition further, placing downward pressure on margins.

  As to the question of whether this is market failure, I point to that part of the Treasurer's advice that this is still a competitive banking system and that steps have been taken by the government to ensure that it is. I think the steps taken by the Prime Minister to encourage the banks not to increase interest rates in view of the change in the cash rate represents exactly the right sort of jawboning that a government should do in a free enterprise economy like this where we have a competitive banking system.

Senator KERNOT —Mr President, I ask a supplementary question. I am sorry to say that a lot of the minister's answer was irrelevant. I am talking about variable rate home lending.

Senator McMullan —So was he.

Senator KERNOT —No, he was not. He was concentrating on a whole lot of other things as well. If competition is working, why do we have most banks setting and holding similar rates on these loans and simply pretending that competition exists because they give a few special offers on housing in top-up mortgage concessions?

Senator COOK —With regard to the first jibe from Senator Kernot, can I say that I was talking about those issues, too, but I did not selectively separate out one element of a bank's activities and pretend that that can be insulated from all other elements of a bank's activities. We must look at the broad spread, and I was making that point.

  As any television viewer or newspaper reader would know, there is competition between banks for mortgagees' trade at present. One advertisement that I can call to mind depicts swimming pools, cars and other things stacked on top of a house in order to attract customers through the door. There is a whole range of other types of competition. As the advice from the Treasurer that I have given indicates, there is a competitive ethic working here. One always has to be careful to ensure that we encourage even greater competition, and that is what this government has done.