Confident Investor

The Banks are running out of excuses

In a previous blog I wrote of the resilience of the banks in refusing to cut their mortgage rates to provide Australians suffering from mortgage stress with much needed relief.

K.Rudd’s recent back-flip on this issue is obviously a result of his desperation for the banks to support his proposed Deposits Guarantee and bank executive remuneration limitations.

The K.Rudd Government recently succumbed to the pressure of his new banking buddies and publicly supported them in not passing on the full 1% cut in the OCR by the RBA earlier this month.

I recently looked at the spread between the 90 Day Bank Bills and Overnight Index Swaps and noticed that the margin has reduced by more than 50% down from a high of 143 basis points.

This tells us that the increased cost of funding that the banks have touted as their principle reason for not decreasing mortgage rates has now been negated.

Spreads have now receded to the levels that the banks have already provisioned for as a result of the credit crisis.

Of course we all know that the banks are simply using the volatility of the global financial crisis to dupe customers into paying higher margins on their borrowings than is obviously necessary in order to increase and protect their revenue for as long as possible.

Why? Because when it comes to crunch time, they are likely to need every dollar they can get to survive.

This recent contraction in spreads means that the banks are quickly running out of excuses as to why they are not passing on the RBA’s interest rate cuts in full. And with another 50 – 100 basis points (0.50% - 1%) forecast in RBA cuts before Christmas, pressure is mounting for the banks to pass on further interest rate decreases to borrowers in order to provide them with the level of mortgage relief required and to prevent further softening in household spending.

With the potential of Australia facing a recession inside of twelve months, the banks should be doing everything possible to alleviate the pressures of mortgage stress upon their customers.

ANZ and NAB have both followed the lead of Aussie and now passed on the additional 20bps (0.20%) on their Standard Variable Rate home loans…..so what are the other banks doing?

Bring on BankWatch….it may be the only effective way to keep the them all honest!

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Comments

1. 228. imobi

   Added on: January 3, 2009 22:03pm

   yo…

   Thank you! I would now go on this blog every day!…

2. 2373. Vince Delmonte

   Added on: April 15, 2009 16:44pm

   I can tell that this is not the first time at all that you mention the topic. Why have you chosen it again?

3. 3224. Tim Hewson

   Added on: April 30, 2009 12:13pm

   Vince

   Like most Australian’s I‘m very concerned about the lack of willingness by the banks to pass on the RBA’s OCR cuts to their standard variable rate mortgages.

   Australian banks have an economic, financial, social and moral responsibility to do so.

   Monetary Policy is used to adjust the official cash rate in order to influence market interest rates and hence the flow of capital. As such, it is the sole responsibility of banks and other lenders to ensure that the mechanism of Monetary Policy works properly.

   You’ve probably seen a lot of publicity recently about how banks have dropped their rates on terms deposits and increased their rates on fixed rates home loans?

   Basically, banks are lowering their cost of funding and increasing their margins. So unless you are a shareholder of the banks, you are unlikely to benefit from this.

   You might remember that the Federal Government recently agreed to guarantee deposits of ADI’s?

   In combination with the deposit guarantee, the RBA has also:
   • increased market liquidity,
   • absorbed a truck load of junk debt from bank balance sheets,
   • provided banks with a AAA credit rating to improve their capacity to borrow offshore,
   • introduced Rudd Bank and
   • provided support to the mortgage market through various capital injection initiatives like the First Home Owners Grant.

   At the same time, the banks have increased their foot hold in the mortgage market as a result of the collapse of mortgage brokers who were affected by the credit crisis and funding from the securitisation market all but disappearing.

   In total, the Federal Government has already given away an estimated $52 billion in assistance and they are likely to give away another $50 billion plus in the upcoming May Budget.

   In my opinion, Australian banks share many characteristics of a cartel. More importantly, they have effectively done very little to help alleviate the severity of the current Global Financial Crisis and its affect on Australians and the Australian economy.

   A 10% reduction in Directors salaries does very little to alleviate mortgages stress.

   Their unwillingness to pass on interest rates cuts essentially makes Monetary Policy ineffective. Simply using the excuse of increased funding costs is no longer suitable – credit spreads have significantly contracted from their 2008 peak.

   The banks have been hand-delivered cash under the guise of the Deposits Guarantee and they still refuse to play ball when it comes to giving a little back.

   I suppose something could also be said for the Government’s lack of diligence in attaching specific conditions to the Deposits Guarantee?

   As it relates to the recent controversy over the First Home Owners Grant, I have to agree with the sentiment that this $25 billion bubble is likely to end very badly for a lot of first home buyers. And in the long run, will also cause problems for the broader property market and related industries.

   Whilst the April Fujitsu Consulting figures indicate mortgage stress is likely to have declined by 2.8% to just 568,000 households, it’s the threat of a worsening recession and rising unemployment which is likely to act as the catalyst that will again see these numbers increase to 1 million and beyond in the very near future.

   Why do I continue to write about this issue? Because it’s an incredibly important one. It has vast ramifications for the entire economy and affects everybody.

   I’d like to hear from anyone who thinks differently!

4. 8567. Dirnov

   Added on: September 18, 2009 21:38pm

   Thank you! I would now go on this blog every day!

5. 8644. Jinny

   Added on: September 21, 2009 6:10am

   Not sure that this is true:), but thanks for a post.
   Jinny

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