Bastard banks making a comeback after the boom
LIKE darning socks, car-pooling and drinking instant coffee, bank bashing went out of favour when we were all getting rich during “the great neo-liberal experiment”. Now, from the top office in the land down, this wholesome pursuit is making a comeback.
It’s not that the banks ever lost their talent for bastardry. It’s just that for a decade or so it has been suppressed by competition – from the likes of Aussie and Wizard – and by the buoyant economy. That $140 annual account-keeping fee didn’t look so bad when your credit card was in the black and the value of your house had doubled in the past two years. But with competition to the Big Four now all but wiped out, leaving the Westpac, Commonwealth, NAB and ANZ as the last saviours of our financial system (just ask them), the bastards inside can once again be unleashed.
The Commonwealth took one for the team this week when it raised variable home loan rates 0.1 percentage points to 5.74 per cent. It was the first mortgage rate increase by the banks since last year but won’t, unfortunately, be the last.
There are sound reasons for the Commonwealth’s unpopular move. Firstly, it already had the cheapest mortgages in the market among the Big Four banks. Secondly, the cost of borrowing the funds it needs to resell to customers as home loans is near record levels and getting higher. (It’s complicated but my more-numerate colleagues assure me the bank’s arguments hold water.) And, thirdly, all of the Commonwealth’s competitors, having already trousered about 40 basis points of the Reserve Bank’s rate cuts since September, would dearly love to do the same. They were no doubt deterred by the public evisceration of the first-mover and the explicit threats from Kevin Rudd and Wayne Swan for others to hold their ground. Banks, after all, love nothing more than taking the moral high ground.
What has so infuriated Rudd and Swan is not just that CEO Ralph Norris at the Commonwealth appears to be thumbing his nose at the government, undermining Labor’s efforts to stimulate the economy into recovery and, possibly, forcing the Reserve Bank to cut rates again. It’s the perception that the banks are padding their bottom lines, abusing the very market power the government’s crisis-inspired actions have allowed them to build. What a betrayal of John Q. Taxpayer.
The government can’t be criticised for acting quickly to protect the banks when all hell broke loose in September. You can’t have a functioning and, god willing, recovering economy without a functioning financial system – and Australia’s is now the envy of the Western world. But just about everything the government did in those few crazy weeks late last year consolidated power among the Big Four banks, which are actually looking increasingly like the Big Two (the Commonwealth and Westpac).
The guarantee on customers’ deposits slowed the flight of cash from smaller institutions but not before the Big Four became the preferred home for household savings. Tens of billions of dollars have poured into the Big Four, dramatically reducing their need to tap expensive, overseas debt markets for their funding.
More important was the guarantee on banks’ “wholesale funding”, which effectively allowed the banks to borrow the government’s AAA credit rating, for a fee, to raise money more cheaply in overseas markets. The banks leapt at the chance, raising more than $100bn to strengthen their balance sheets.
Smaller institutions with weaker credit ratings had to pay a higher fee, making it more expensive. Some had to stop giving loans altogether, leaving the Big Four (or Big Two) to skip away from their enfeebled competitors, effectively recreating, then entrenching, the big bank oligopoly. Westpac’s takeover of St George and the Commonwealth’s takeover of BankWest and chunks of Aussie and Wizard hasn’t helped. In the past year, the Big Four’s share of the mortgage market has risen from 58 per cent to 72 per cent. It’s a similar story with deposits.
Competition tsar Graeme Samuel, who wishes the BankWest deal hadn’t happened, laments the “comfortable competition” now enjoyed by the big banks. There are still areas where the banks compete, er, fiercely. The chase for deposits, for example, has meant that the interest rates they pay you and me are uncomfortably close to the Reserve Bank rate of 3 per cent. But we’re still talking about a group of banks that rip out $11.6bn in fees from customers each year and, between the Big Four, made an operating profit after tax of $8.9bn - almost $50m a day - in the second half of last year, even as the financial world imploded.
That it was the Commonwealth Bank that moved first to raise rates is doubly disappointing. Even though the government hasn’t had a stake in the bank since the 1990s, Australians still feel a certain level of ownership, expectation and trust towards the institution. It’s the same with Qantas; When Australians are stranded overseas after some natural disaster, we expect the (fully privatised) national flag carrier to bring us home. Now, in our time of economic need, we should be able to turn to the Commonwealth Bank.
In reality, the Commonwealth has no more obligation to help us out than Westpac, Qantas or any other private company with its own shareholders to consider. But if any bank is going to do the right thing, then surely it’s the Commonwealth. (Remember the outrage when stories emerged of the bank’s lack of compassion for victims of the Victorian bushfires. It saw the light after Norris took a phone call from the Treasurer.)
Shareholders - and the Commonwealth has almost 750,000 - want the banks to act like bastards. Millions of customers, and most Australians, expect it. How disappointing. Let the bashing begin.
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