Wednesday, November 10, 2010

Demand a better deal and stop moaning about banks

Forgive me if I'm less than impressed by the tirade of righteous indignation being unleashed against the banks. It's self-serving, selective and uninformed.

I guess when you get angry you forget to check things out and think them through. The media and the politicians on both sides are whipping up indignation, rather than conveying information and fostering understanding.

Much of the indignation has assumed that if the Commonwealth Bank has raised its mortgage interest rate by 0.2 percentage points more than the 0.25 percentage-point increase in the official interest rate, the other three big banks are sure to follow suit.

But so far they haven't. And I think it's unlikely they will. My bet is that some will raise their rates by more than the official increase, but by less than the Commonwealth. And at least one of them won't exceed the official increase. If that bank is National Australia Bank, its rate will be 0.32 percentage points lower than the Commonwealth's.

If I'm on the right track, the oft-repeated claim that there's no competition between the banks will be seen as false.

But let's say I'm quite wrong and all the banks do as the cynics expect and follow the Commonwealth's lead in raising their mortgage rates by almost double the official increase. In that event home buyers won't end up being any worse off.

Why not? Because the Reserve Bank has left little doubt it expects to announce further rate rises in the months ahead. With the economy back in a resources boom, it will be raising rates to discourage borrowing and spending and thus limit inflation pressure.

And here's the trick none of the rabble-rousers bothered to tell the punters: the Reserve long ago made it clear that the interest rates it cares about are those actually paid by households and businesses, not its own official rate. So if the banks get ahead of the game and raise their rates by twice the increase in the official rate, that just means we'll end up with one less increase in the official rate than we would have. It will all come out in the wash.

Another unwarranted assumption by the indignation merchants is that all of us are borrowers from the banks and none of us are lenders to the banks. Nonsense. Many people - including those in or approaching retirement, those who rent and those saving for a home deposit - have savings deposited with banks.

And those people have benefited from the same process people with home loans have been complaining about. The banks have justified their various rate rises in excess of official increases by saying the cost to them of the funds they borrow for lending to home buyers and businesses has risen by more than the increase in the official rate. This isn't always true, but it does contain a significant element of truth. And one respect in which it's true is that the banks are now paying much higher interest rates on deposits, particularly term deposits.

Before the global financial crisis, the rates the banks paid on term deposits were below the official interest rate. Now, however, they're well above it. Although the official rate is now 4.75 per cent, it's easy to get better than 6 per cent on a six-month deposit.

(And don't forget that every home buyer with money parked in a "redraw" account is a lender as well as a borrower. Most of these people would, in effect, be earning an interest rate on their savings equal to the rate they pay on their loan.)

In the aftermath of the crisis, the banks decided they'd be better off getting more of their funds from retail depositors and less from wholesale money markets here and overseas. But as they battled for more deposits, they bid up the rates on those deposits to unheard of levels - further proof that competition between the big four isn't dead.

Another sign of competition between the banks that the rabble-rousers haven't seen fit to remind us of is the way NAB has led the way in cutting its fees and charges, including unreasonable charges on credit cards.

Everyone imagines the greedy banks love picking on helpless home buyers when they're trying to protect their profit margins by passing on their higher costs of borrowing. Don't kid yourself. They hate it because they know home buyers are protected by the fuss-making media and politicians.

So what do they do? They push more of their higher costs off onto business - particularly small business - and less onto home buyers. This gives them less grief from the noise-makers while imposing a hidden cost on the economy's ability to create jobs.

We're suckers for illusions.

The media always quote the banks' announced "indicator" rates on home loans. Before the latest rise in the official rate, the average indicator for standard variable mortgages from banks was 7.4 per cent. But whereas small businesses often pay more than their indicator rate, home buyers usually pay less. The actual rate paid by people with mortgages averaged 6.75 per cent - a discount of 0.65 percentage points.

Why do bank managers charge less than the announced price? Because they're afraid of losing business to their competitors. But guess what? The biggest discounts go to those who bargain - those who look around at what others are offering and threaten to move unless their existing lender offers a better deal.

The trouble with all the media and political fuss about rates is it reinforces the impression "competition" is something the banks - or the government - should deliver to us on a plate.

Sorry, whingeing lazybones, markets don't work like that. Those who say competition between the banks is inadequate are right. But they should be looking in the mirror as they say it.