As a child, my parents read to me the classic childhood tale of the boy who cried wolf, a tale that cautions against repeatedly claiming danger when there is none.

The Daily Telegraph's Eric Lobbecke

Last year, businesses throughout the world experienced danger associated with the global financial crisis.  The risk of a catastrophic collapse of confidence was very real and to the credit of the Australian Government, and other governments around the world, there was quick action to restore investor confidence.  The stimulus package might not have been perfect, nor was it always directed in the best way possible, but it did its job.

But if you have been listening to the banks of late, you might get the sense the crisis has not passed, that profitability is under grave threat and that interest rate margins are too low. I dispute this.

As the crisis has passed, the banks remain in strong shape.  Despite the global downturn, three of Australia’s big four are trading at near record levels – Commonwealth Bank’s latest yearly profit was $4.7 billion (down 1%), Westpac $3.4 billion (down 11%), ANZ $2.9 billion (down 11%).  The NAB has seen its yearly profits fall 43% to $2.5 billion but this is, for the most part, due to an increase in its provision for bad debts by $1.1 billion due to deteriorating conditions in its UK business.

Better still for them, the Australian taxpayers have provided a guarantee of deposits.  This one action gave the banks an incredible leg-up in the home mortgage market, and incidentally added a potential notional liability of $100 billion on to the Australian balance sheet.

Now the likelihood of that $100 billion or even a portion of it being called in is remote – in part because the financial markets have stabilised, our banks are well capitalised and the loans on their books are of good quality.  Nevertheless, the Australian people, through the Federal Government, have put up their hand and said they would guarantee the deposits of the banks, in the same way a parent might guarantee the loan taken out by a son or daughter.

In my book, this all means that the banks now have a reciprocal obligation to the Australian people to do their part in protecting jobs and growing Australia through a difficult financial period.  The fact is, during this period of instability, the banks have been playing games with interest rates and it’s about time that game was exposed and stopped.

Much has been made of the fact that Westpac last week lifted rates 20 basis points higher than the Reserve Bank increase.  Yet this isn’t the real story about banks and interest rates.  The real story is that the banks have pocketed over 145 basis points from Australia’s 750,000 employing small businesses, and not one politician has said one word in defence of them. 

From September 2008 to October 2009, the Reserve Bank’s official interest rate fell 400 basis points (or 4 percentage points).  During this time mortgage rates fell 355 basis points but small business overdrafts only fell 255 basis points.

In other words, when interest rates were falling the banks pocketed 45 basis points (or 0.45 percentage points) from home owners, but they pocketed a massive 145 basis points (or 1.45 percentage points) from small businesses.

For a small business with an overdraft of $300,000 this means the banks withheld $4,350 which should have been passed on to them.

Now some would say that loans to small businesses are riskier than loans for homes – but that is answered by the fact that historically small business overdraft rates are around 2 percentage points higher than mortgage rates.  In the past year, that figure, for no apparent reason has blown out to 3 percentage points.

Of even greater concern to small business is that the banks have become more restrictive in their lending practices over the past 12 months and credit has become even tighter. 

The fact is that it wasn’t lending to small businesses that caused the GFC.  In reality, the GFC was caused by greed at the big end of town and by home owners over-extending themselves.  Small business, on the other hand, has always proved itself to be a pretty safe risk.  Small business owners, by their nature, are passionate workers, committed to making their business work.  They work hard, employ people and are the real engine room of the economy.  Australia has over 750,000 employing small businesses throughout the country and these businesses employ more people than the big end of town.  These businesses are the newsagencies, dry cleaners, corner shops, local travel agents, car yards and law firms that service our towns and cities, and who through good times and bad, employ people, contribute to communities and keep our economy moving.

The Treasurer Wayne Swan was very vocal when Westpac slugged homeowners an additional 23 basis points on their home loans, but has been very silent about the 145 basis points the banks have slugged small business over the past year.  Surely Mr Swan should be speaking up for Australia’s 750,000 small businesses who have been slugged six times as much as Westpac’s recent home loan surprise?

If we are going to have a debate about interest rates, let’s have a fair dinkum one.  Front and centre of any debate has to be the capacity of small business to access finance and the bank’s fair treatment of those businesses.

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    • John A Neve says:

      04:52am | 10/12/09

      People seem to forget, we sold off the state and commonwealth banks. They, like other businesses, can now charge what the market will bear.

      The banks are also correct if they are suggesting the financial crisis is over.
      In my view it isn’t, all our governments have done is prop up a failing system with more government debt.

      We now live in a country which has the largest public and private debt of all time. Makes one feel good, doesn’t it?

    • John A Neve says:

      06:21am | 10/12/09

      Lazy fingers again, “crisis is over” should read crisis isn’t over.

    • Lach says:

      09:30am | 10/12/09

      If we are going to have a debate about interest rates then lets at least differentiate the meaning of the cash rate (overnight lending between banks of high creditworthiness) and mortgage lending (30 years to a lower creditworthy individual).

      The ‘target’ cash rate is not the only indicator of what you should expect to pay on your mortgage. Anybody who makes this claim assumes banks fund all of their activities with overnight borrowings rolled over daily, which is incorrect.

    • N says:

      09:51am | 10/12/09

      Lach; I’ve always been interested in that. Why then do RBA lift rates and hours / days later the banks lift their rates? I’m sure you can appreciate why Joe Average sees the two as mutually inclusive.

      Perhaps its the media whipping an easy target like the banks, but if I owned a bank and the RBA rate wasn’t primarily driving my interest rate level, I would be making it very clear to all and sundry.

    • Lach says:

      10:29am | 10/12/09

      Well the animation was an attempt, but look how quickly the media trashed that education effort.

      Its probably due to menu costs that banks don’t update rates every day, and in any case most of the movements in rates of other maturities of loans happen in response to changes in the overnight rate (albeit to differing extents due to other factors).

      Interestingly the RBA has the power to set interests rates officially (actually dictate what would be the interest rate for a mortgage) but they choose not to use it. Instead they rely on manipulating a free market in overnight money by printing more of it to compete with existing money (in the case of a target rate reduction). Any effect on mortgage rates using this method is indirect at best.

    • Steve says:

      10:54am | 10/12/09

      They charge small business more because there is no one else offering a better deal.

      Why would that be?

    • Lach says:

      11:54am | 10/12/09

      True, there definitely could be more competition in lending, however onerous regulation of the banking sector prevents new entrants from gaining a foothold. Red tape is only going to increase as policymakers respond to the ‘causes’ of the GFC. Increased capital requirements and regulation of so called ‘predatory lending’ are some examples.

    • John A Neve says:

      12:13pm | 10/12/09

      We’ve done it again, five posts all about interest rates!  What are interest rates? They are a cost, just like any thing you buy, there is a cost. No one likes increased costs, but under our current system costs will always increase, any dropping of costs is soon replaced withan even bigger cost.

      This is all part of the “free market” we promote the “free market”, we just like to whinge about increased costs.

      What I’d like to know is just what people really want?

      Nothing is free, where is the logic in all these posts, if at the end of the day
      you do nothing about it?

    • danj says:

      12:50pm | 10/12/09

      I don’t work for any bank (well I’m not an employee anyway). But I think that the uneducated general public are too quick to rubbish banks. Everyone talks about bank’s record profits in dollar terms. How about talking about profits in return on capital percentage terms. When shown like this the profits aren’t that impressive, usually struggling to make 10% which most viable businesses would be aiming for.

      Banks also have a right to protect themselves from overexposure to a certain market. Figures last week showed that Westpac has 70% of its loans out in the property market compared to 25% with the NAB. Perhaps Westpac decided that they were exposed to a bit too much risk and raised rates to both protect themselves and perhaps even to make people look elsewhere.

      At the end of the day the banks aren’t owned by the government therefore are not accountable to governments or anyone else for that matter other than their shareholders. They therefore have the right to make their own decisions like any other business in Australia from BHP down to a milk bar owner.

      The banks didn’t even want or need Saint Kevin’s deposit guarantee. It was just a usual decision made on a whim because the Americans were doing it, so this is not an argument either.

      Let’s lift maturity of the arguments against banks above what A Current Affair (the New Idea of TV) bangs on about.

    • AFR says:

      04:02pm | 10/12/09

      Funny how a year ago we were praising our banks for being so stable in the middle of a GFC, but now that’s over, time to sink the boot in again. Sure we don’t have a lot of major lenders, but for your mortgage, there are hundreds of options. Why not do some research?

    • Peter of Adelaide says:

      05:24am | 12/12/09

      So let me get this straight. Westpac has 70% in property.  They increase the rates to protect themselves.  From what defaulters?

      I would think raising rates higher would cause more defaults not less.  It seems counter intuitive to me.

      While banks are indeed a business, and need to turn a profit.  The question is why the *need* to make record profits, often at the expense of its customers?

      To add a bit of perspective, back when I was a child, I remember seeing an ad for a bank saying it had just got to the 2 billion mark, and it was secure.  Now they make that and even double that per year in just profits.

    • danj says:

      11:05am | 13/12/09

      @Peter. Have you never heard of risk margins? This is what I’m talking about, people such as yourself offer an opinion on something you know nothing about.

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      08:08am | 11/04/10

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