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Sunday, May 6, 2012

Banks - an exercise in greed

On Tuesday, 1 May 2012, the Reserve Bank of Australia (RBA) decided to hand down an interest rate cut of 5 basis points (0.5%).

Yet again the 'big four' banks (ANZ, NAB, Westpac and Commonwealth) have displayed their collective greed by not applying this rate cut in full.

The ANZ must have seen the writing on the wall, as they put up their rates by 6 basis points (0.6%) in mid-April, two weeks before the RBA board was to meet. On 2 May 2012, the day after the RBA decision, ANZ announced a record profit.  ANZ defered its decision until 11 May 2012, when it finally announced that it would also not pass on the full rate cut, but only reduce rates by 0.37%. To add insult to injury, ANZ stated that the rate cut would not take effect until 18 May 2012. Analysts calculate that banks earn $12 million per day for every day they don't pass on the rate cut. For the 17 days that the ANZ does not pass on the rate cut, they will pocket around $204 million!

Westpac also announced a record profit yet, only passed on a 0.37% rate cut.  The Commonwealth Bank passed on 0.4% and NAB passed on 0.32%.

Based on the analysis mentioned earlier, as ANZ and Westpac have only passed on 74% of the rate cut that the RBA provides to them, they will continue to pocket a further 26% of that estimated $12 million per day, which equates to around $3 million per day.  For NAB, their 64% of the RBA rate cut will continue to earn them 36% of the $12 million, or $4.3 million per day, while Commonwealth's 80% of the RBA rate cut will earn them $2.4 million per day.

The banks argue that RBA cuts only affect a portion of their business and that current funding costs are high as they compete for deposits through offering higher interest rates on savings, including fixed term deposits.  This argument has a few flaws, in particular because the RBA factors the impact of interest rates on both borrowings and deposits.   If the cost of deposits was having such a detrimental effect on the banks then why are their profits increasing significantly?

Surprisingly, the RBA economists are generally competent and not prone to flights of fancy. They understand that an interest rate cut does not benefit investments such as savings and superannuation, and considers this before any decision on moving interest rates.

The RBA cuts interest rates to stimulate the economy, conversely they raise interest rates if the economy needs slowing down.  Banks usually pass increases on in full and immediately.  Yet, they are very tardy in passing on decreases.  How is an RBA rate cut going to stimulate the economy if the cut isn't passed onto the consumer?  The reason the economy needs stimulating is because of poor consumer and business confidence, resulting in a suppressed retail sector, slow real estate market, struggling manufacturing sector, lack of business investment and reluctance to employ staff, coupled with rising costs in key areas such as electricity, fuel and public transport ... amongst other things.

Banks, like every business, are expected to make profits.  However profits should come from fair trade practices, not from exploiting benefits aimed at others and society in general. The banks are gouging, as reflected in their record profits, and it is having a detrimental affect on the economy.

The government should consider laws requiring  banks to pass on RBA rate decisions in full and within 24 hours of the RBA announcement.

Please sign the following petition urging the CEOs of the 'big four' banks to pass on the interest rate cut in full:

The petition is available through 'Sum of Us', a world-wide movement campaigning for a better global economy.

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