RBA Governor Phil Lowe gave his first address to the House of Representatives Standing Committee on Economics this morning. Besides setting out his views on the outlook for the economy, which the ANZ said was “glass half full”, he also aid the RBA was not full of “inflation nutters” and he put together a “handout” on Australian banking to accompany his opening testimony.
It looks at a number of metrics for the Australian banking system. Things like net interest margin, liquidity and capital ratios, return on equity, deposit and lending rates amongst others.
But two charts jump out which make it easy to understand why the banks are always in the cross hairs of parliamentarians, and other observers.
It seems that even though there is often some obfuscation around funding pressure on the banks and increases in the cost of raising capital due to regulatory requirements, or costs from offshore markets, governor Lowe pointed out that “the RBA cash rate remains the main driver of bank funding costs, although the funding mix and spreads also change through time”.
But because income is also falling with the cash rate, as mortgages reprice lower, the banking system has stepped up the margin it is charging borrowers over cash in order to maintain profitability.
Governor Lowe’s handout said that “the spread between banks’ mortgage rates and the cash rate declined significantly in the 1990s, but moved higher by nearly two percentage points following the global financial crisis (GFC)”.
But he highlighted because almost no one pays the standard variable rate these days “the average mortgage rate actually paid has not risen by as much as the standard variable rate (SVR) since the GFC”.
Taken at face value the combination of these two charts suggests Australia’s banking sector is making out like bandits.
But the very first chart in governor Lowe’s handout seeks to clarify any misunderstanding that observers could make by looking at different charts in isolation.
Lowe says the banks net interest margin, “the difference between interest earned and interest paid as a share of interest-earning assets… has been little changed over the past decade.”
So not bandits after all, it seems.
Greg McKenna has been working in banking and finance since 1986. He is currently a director at Police Bank, a customer owned bank.