The heat is rising for Australia's banks on rates

Photo: Toshifumi Kitamura/ AFP/ Getty Images.

This week the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to a fresh record-low of 1.50% at its August monetary policy meeting.

The decision was expected by a majority of economists and those in financial markets.

Since the rate cut prime minister Malcolm Turnbull has said the banks should pass on in full rate cut and, if not, explain why.

“They should pass it all on. They should do that, and if they are not prepared to do it, as appears to be the case, then their chief executives should explain very clearly to the Australian people and their customers why they have not done so,” Turnbull said.

Despite the PM’s calls, none of the big four did so.

Photo: Cameron Spencer/ Getty Images.

On Wednesday, Australian banks got hammered. By the close, Commonwealth Bank of Australia shares fell 2%, ANZ Bank dropped 1.9%, NAB Bank shed 2.8% and Westpac lost 2.5%.

The banks argue they face growing pressures which are driving up their funding costs from increased regulation at home and abroad, and face fierce competition for deposits.

But they also acknowledge they must do more to explain the reasons behind their decisions.

“We must to do better as an industry in explaining these dilemmas and the drivers of the decisions we make with all our stakeholders,” said ANZ CEO Shayne Elliott.

Doing that would require a level of transparency that hitherto bank managements and boards have been uncomfortable with.

But the banks have a potentially unexpected ally in an RBA research paper which was released as part of its march Quarter Bulletin. The authors, Kelsey Wilkins, George Gardner, and Blair Chapman who work in the bank’s Domestic Markets Department said bank lending rates are not just about the cash rate:

An important element in determining the overall cost of banks’ funding is the level of the cash rate, which acts as an anchor for the broader interest rate structure of the domestic financial system. Nevertheless, changes in the level of compensation demanded by investors to hold bank debt, competitive pressures and non-price factors (such as funding composition) can influence banks’ funding costs significantly.

But that hasn’t stopped continued calls for a bank inquiry. Even from former RBA Board members.

On the ABC’s 7.30 program last night former RBA board member John Edwards said “some kind of inquiry” would be “helpful”.

“Well I think he’s [Turnbull] – I think he’s taken a good stand. You know, I think the banks should have passed that on. I think it’d be helpful for the Australian economy and I rather think that’s what the RBA would have intended.”

When reporter Sabra Lane asked whether a royal commission was warranted, Edwards said:

Well I think some kind of inquiry would be helpful. We’ve – we of course had the Murray inquiry, which I think was useful, but I think we do need to do a lot more work on the quality of financial advice being offered by banks, particularly because they’ve become such a huge presence in funds management and because the population is ageing. You know, their authority in that area is becoming vastly bigger than it was even a decade ago and I think that’s where we need to get a better idea of what the culture is and how good the performance and practice is.

Read the full 7.30 transcript here.

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