There is a way that interest rate movements by the banks could be more fairly controlled, but will the next-elected Federal Government be brave enough to do it?
By STUART WEMYSS
Since the beginning of 2008, Australia’s top five banks have increased their mortgage rates by 0.92 per cent to 1.19 per cent more than the Reserve Bank of Australia (RBA), citing higher funding costs as the reason behind the increases.
Despite this message, in the past 12 months we have seen the banks report record profits, such as the Commonwealth Bank’s half-year profit of $2.9 billion – up 13 per cent.
More now than ever, Australians are highly skeptical of the banks and their profiteering behaviour, as competition in the banking sector evaporated when many second-tier lenders were acquired by the Big Four during the global financial crisis.
The Rudd Government’s support of the big banks (and consequently less support for smaller players) has handed the Big Four banks tremendous market power. It’s time for Federal Opposition Leader Tony Abbott or Prime Minister Julia Gillard to step in and rein in some of this power.
The solution is to empower the RBA to disallow interest rate changes that are out of line with official RBA cash rate movements. Any bank wanting to increase or decrease its home loan rates by more or less than the RBA’s cash rate movements would need to notify the RBA in advance and justify its decision. The RBA could disallow the change if it thought that it wasn’t representative of underlying cost and/or contrary to the public interest.
This approach is similar to the supervision of health insurance premium rates. The RBA would continue to act independently from the government.
In recognition that interest rates are a politically sensitive issue, it’s important that this supervisory role is attended to by an authority independent to the government.
I believe that this approach will restore confidence in the banking sector and provide hard-working Australians with the comfort that the big banks aren’t profiteering.
It will restore the integrity of the banking sector and provide the RBA with greater control of Australia’s interest rate market.
The RBA would act as an ‘independent umpire’ to ensure that home affordability isn’t adversely impacted by profit-hungry banks.
Stuart Wemyss is a qualified financial planner, chartered accountant, mortgage broker and founder of financial advisory firm ProSolution Private Clients. Stuart is the author of the Smart Borrowers Handbook and The Property Puzzle (available at www.businessmall.com.au). He can be contacted at www.prosolution.com.au
API readers – what do you think?
Haah Aussies think they got it bad. I have a company in the US and found the American banking system to be the most backward I have come accross. My Business account is with a major provider but for standard every day transfers online residents get charged by some backs $17 a transfer. As a business I pay USD$12.50 per online transfer, USD$10 to receive wire transfers INTO MY Account along with the standard fee out of my account PLUS a USD$19 a month account keeping fee. This was one of the banks that got into difficulty as well! Wouldnt Australian banks love to charge those rates for online transfers to their customers …im sure of it!. No other business in the World (Australia included) gets looked after so well as the banks do by Governments ..of course theres some logic in that but when have the banks repaid in kind to both government and citizens for the “tough times” and going into good times? NEVER ..never have and never will get a fat lot of thankyou.
Comment by Rob Forex Trading Mentor — July 29, 2010 @ 8:41 pm
Hi Rob,
Profit margins (interest rate margin) on mortgages in the US and UK are histroically a lot less than Australia which is probably why they try and claw back some profit via higher fees. In any case, my point remains that if left unchecked, banks could take advantage of market power (as it would be in the shareholders best interest) which results in higher interest rates and fees.
Cheers
Stuart
Comment by Stuart Wemyss — July 30, 2010 @ 3:20 pm