Banks grab profits from rate cuts

The West Australian, 19 June 2017

Researchers have found banks have discovered more ways to grab profits.

The nation’s banks have taken for themselves almost two full percentage points worth of cuts in official interest rates with half going to their bottom lines at the expense of customers.

In a sign of what major banks are likely to do with the Federal Government’s planned $6.2 billion levy, research by the Reserve Bank shows mortgage holders and businesses have borne the brunt of years of bank cost shifting.

Reserve Bank researchers Tim Atkin and Belinda Cheung found that since the outset of the global financial crisis in mid-2008, the RBA had sliced official interest rates by a total of 5.75 percentage points.

But key mortgage lending rates offered by the nation’s banks had only fallen a combined 3.9 percentage points.

The researchers said some of the difference was because of an increase in global borrowing costs beyond the control of the banks, but at least 1.1 percentage points was because of a grab for profits.

On a 25-year, $300,000 mortgage, the 1.1 percentage point is equivalent to almost $200 a month or more than $56,000 over the life of the loan.

Since the GFC, regulators have forced banks to be more conservative, with the Government now striving to make the sector “unquestionably strong”.

But the researchers found the banks, while adopting tighter restrictions, had found more ways to grab profits.

“(It) likely reflects banks’ efforts to offset the impact on their earnings from new regulations requiring them to hold a greater amount of high-quality liquid assets, which typically have a yield that is less than the cost of funding,” they said.

Banks warned at last week’s inquiry into the planned six-basis-point levy, due to start from July 1, that the cost of the impost is likely to be passed on.