Banks stymie monetary stimulus

PM - Wednesday, 8 April , 2009 18:10:00

Reporter: Ashley Hall

LISA MILLAR: All four of the big banks are ignoring the pressure from government and customers,
declaring they won't fully pass on the Reserve Bank's interest rate cut.

The RBA yesterday cut the cash rate by a quarter of a percentage point, but Westpac, ANZ and the
Commonwealth Bank will drop their standard variable rates by just one-tenth of a percentage point.

The National Australia Bank is keeping all of the cut for itself.

It means the margin the banks charge above the cash rate has been increasing since November 2007.

And banking experts say that cash grab can no longer be justified.

Ashley Hall reports.

ASHLEY HALL: There are really only two main levers you can pull if you're trying to stimulate the
economy. Using fiscal policy, you can increase government spending and put more money into people's
pockets.

Under monetary policy, the central bank can lower interest rates, making it cheaper for individuals
and businesses to borrow money. But in today's economy, that depends on private banks passing on
any interest rate cuts.

The Treasurer Wayne Swan says that until now, the banks have been pretty good at passing on most of
the cuts.

WAYNE SWAN: There's been something like rate cuts from the Reserve Bank of 400 basis points prior
to yesterday and something like 385 of those have been passed on by all of the major banks, so what
that has meant in Australia is that monetary policy here has been much, much more effective than it
has been in many other countries.

ASHLEY HALL: But now the big banks are holding out. Westpac, ANZ and the Commonwealth Bank are only
cutting their standard variable rates by one-tenth of a percentage point. The National Australia
Bank is not passing on any of the rate cut.

SHAUN CORNELIUS: When you look right back to over a year ago when rates were actually increasing,
we see that some of the banks margins between the cash rates and the actual rates in the market has
grown so that is a concern.

ASHLEY HALL: Shaun Cornelius is the chief executive of the lending comparison website InfoChoice.
He says in November 2007, the difference between the RBA rate and the average variable rate was
1.82 percentage points.

But in the last year and a half that difference has blown out in the banks favour by nearly one
percentage point.

The big banks say they need the bigger margin because the credit crunch has made it more expensive
for them to borrow money on wholesale markets.

But the economics professor at the Melbourne Business School, Joshua Gans says there's little
evidence for that claim.

JOSHUA GANS: When it comes down to it, our banks have a guarantee on their deposits, they have
plenty of them to go around and as I understand it, there isn't a residual risk say to the
Australian housing market from some sub-prime crisis cause we never had those sorts of mortgages in
the first place.

So these sorts of concerns really don't seem to gel.

The editor of the banking newsletter, The Sheet, Ian Rogers says the big four banks don't feel any
pressure to fully pass on interest rate cuts because they face little or no competition.

IAN ROGERS: It's important to remember that the banking industry in Australia is an oligopoly and
it's really fair to call it a cartel and it's no surprise that the banks that are in the cartel
would go about undertaking, you know, price coordination and cartel behaviour.

And for you know, from my following of the public behaviour and the public statements of various
banks over the last few weeks, there has been a clear effort in the normal way the banks go about
these things, which is talking in public about what they are thinking about, in order to coordinate
an increase in margins on home loans and no doubt on other loan products as well and that's what's
going on.

But Joshua Gans says the lack of competition has both an upside and a downside.

JOSHUA GANS: The side that sort of doesn't benefit home owners, that the interest rates don't go
down nearly fast enough, but the other side of competition is that it's possible that that lack of
competitive pressure has kept our banks out of the worst of the global financial crisis.

ASHLEY HALL: He says there's little the Government can do to force the banks to pass on the rate
cut.

Does it mean that monetary policy has now become impotent or if not, impotent at least emasculated?

JOSHUA GANS: I think that's a trend around the world. I mean that's what sets apart this period of
financial crisis from earlier ones, is that we reach a point where monetary policy just simply
cannot do the job of priming the economy out of recession, can't do it on its own.

ASHLEY HALL: So it's likely there'll be more stimulus on the way.

LISA MILLAR: That's Ashley Hall.