Possibly because most journalists live in debt and the political focus is forever on the “mortgage belt”, media coverage of the latest interest rate cuts has predictably concentrated on the minority of Australians who have a home loan.
Just as predictably, the banks have again been savaged for not matching the RBA's 25-point trimming of its cash rate.
A little more surprisingly, plenty of attention has been given to a study that found banks quickly match or exceed RBA rate rises but have sticky fingers when it comes to passing on rate cuts. The surprising bit was the attention given, not the finding. Coming soon: “Bears defecate in woods!”
The reason for banks not matching RBA rate cuts is made obvious by this RBA graph:
It’s all the fault of those greedy people with money. Apparently they’re not willing to deposit their cash in banks unless said banks offer them an attractive interest rate.
It’s competition among the banks for depositors’ funds that limits the extent of mortgage rate reductions, not gouging by overpaid bank CEOs. Well, mainly not gouging by overpaid bank CEOs.
Changes to banks’ capital requirements and a realignment of funding away from flighty foreign markets to domestic sources mean the banks must prudently obtain most of the money they lend to Australians from Australians.
As the graph shows, domestic deposits made up less than 40 per cent of banks’ funding before the GFC hit and now account for about 55 per cent on a rising trend.
The banks have been helped by Australians running scared of risks since suffering losses in equities and housing speculation, but they also have to tempt them with attractive rates. And, given the juicy fully franked dividends on offer, interest rates can’t fall much without losing out in a big way on the risk/reward balancing act.
The UBank brand is an interesting indicator of just how real the competition is. Ubank is a purely online operation owned by NAB, so has all the security of one of the big four. A quick check of its website shows it is offering depositors a very rich 5.71 per cent if they meet the meagre qualifications for the savings bonus.
Given our low inflation rate, that is a very high real interest rate. And they’re selling variable rate mortgages for just 5.75 per cent.
Don’t believe those who might claim there is no competition in Australian banking — most of us are just too slack to take advantage of it.
And there is another issue about just what the headline bank mortgage rates mean anyway — there’s a big difference between them and what the banks are actually charging those who are prepared to haggle and shop around.
Another interesting RBA graph shows that the big banks’ return on shareholders’ funds has been bouncing along in a fairly contained range even since we recovered from the 1990-91 recession.But those graphs don't fit our preferred national narrative of everyone suffering under a usurious mortgage rate while cigar-puffing bankers in top hats grow forever richer.
Michael Pascoe is a BusinessDay contributing editor – with a mortgage.