RBA governor Glenn Stevens says cash rate is lower to offset bank margins

RBA governor Glenn Stevens says the RBA has been forced to set the cash rate at lower than it would have been otherwise due to the banks increasing their profit margins on home loans since the onset of the GFC.

“I've said this countless times, and it's usually ignored, but, yes, the spread between the cash rate and major home loan rates has risen by something like 100 basis points since about 2007," Stevens said as part of a speech in honour of former University of Sydney economist Warren Hogan.

"For that reason, the cash rate is roughly lower than it would have been otherwise, to offset that.

"We have broadly offset that change in the margin by setting our instrument appropriately."

Since 2007, the banks have been able to increase their home loan margins by increasing rates independent of official RBA increases or by not passing on full rate cuts.

This was most in evidence in December 2009 when Westpac raised interest rates by 0.45% on its variable rate mortgages, 20 basis points above the RBA’s official rate increase of o.25%.

Yesterday, ANZ said it would no longer wait until monthly RBA announcements, but would instead make future pricing decisions on the second Friday of every month.

Stevens’ comments follow the major banks taking two full days to eventually decide to pass on the full rate cut to borrowers.

However, all the major banks hinted that they were under pressure to pass on future rate cuts in full by making reference to the increasing cost of raising wholesale funding overseas and in particurlar the problems being experienced in Europe.

During his speech, Stevens delved into what he called the extensive program of regulatory reform under way in Europe and said the most far-reaching proposals recently endorsed at the G-20 summit to protect banks “too big to fail at an international level”, otherwise known as “Globally Systemically Important Financial Institutions, or G-SIFIs”.

“Some 29 individual banks have been identified as fitting the criteria to be labelled G-SIFIs at present, though the list is not a fixed one: banks can enter and leave it over time.

“There will, in due course, be a framework for globally systemic insurance companies with parallel criteria. The intention of the policy is to make the failure of such entities less likely by requiring additional capital, and to make the consequences of failure less dramatic by developing better tools to resolve entities that have failed or are on the point of failure.”

To make this work Stevens says would require “considerable co-operation across jurisdictions at moments where everyone's instinct is to protect creditors and counterparties in their own jurisdiction”

He also suggested that a new era of tighter bank regulation might be dawning as there was now a “certain tendency towards the financial repression that was a feature of the post-war world in which Warren Hogan first studied economics”.

“A legacy of the 1930s was a much tighter regulatory regime for banks, elements of which lasted for decades.”

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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