Are the banks the jockey or the horse?

So who is controlling the levers?

On the first Tuesday in November the Melbourne Cup is run.  Earlier on the same day, the Board of the Reserve Bank determines the target 'cash rate', which is the market interest rate on overnight funds. It usually influences the cash rate through its financial market operations.  The “cash rate” is used by the banks to set their loan rates.

Peter Martin, the economics editor of The Age wrote on 27 October:

‘’Notice how quiet the big four banks have been since they jacked up interest rates? Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Australian bank dividend yields are among the highest in the 99-member MSCI World Bank Index. Photo: FDC

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.’’

Clearly the banks have preferred the interests of their shareholders over the interests of the borrowers when it comes to their response to The Murray Financial System Inquiry...that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

Peter Martin goes on to say ‘’The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.’’

Peter Martin's article can be found here. 

Instead of increasing interest rates the Banks could have budgeted for less profits.

What does this mean for residential borrowers and the business sector?  The banks have assumed the role of the jockey (instead of the Reserve bank) as they ride the economy for their financial glory.  Meanwhile the residential borrowers and the business sector are being called upon to fund the winnings.

Written by Andrew Frank, Managing Director

This article is provided to the reader for general information. It is not legal advice.