OK banks, you’ve had your fun with interest rates
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.
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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