Are the big banks really that rich?

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You lost a noticeable amount of money yesterday when the big four banks opted not to pass on the full rate cut.

The big four banks are raking it in. But should that really be a problem?

AUSTRALIA needs to stop bashing the banks for being profitable. We need robustly healthy banks — the alternative is far, far worse.

Don’t bash them for not passing on every interest rate cut in full, either. They are also paying interest rates on deposits, and yes, they are raising some deposit rates. Look at the gap between banks’ deposit rates and lending rates — it is still low in historical terms.

The picture doesn’t look so rosie when you look at it like this. Source: Banks’ financial reports / RBA

The picture doesn’t look so rosie when you look at it like this. Source: Banks’ financial reports / RBASource:Supplied

Banks that keep cutting lending rates are banks that also keep cutting deposit rates. Aussies save a lot, and if interest rates only go down, anyone saving money — from young people saving for a house to old people saving for retirement — is hurt. Most of the money in Australia’s banks comes from Australian depositors, up from less than half before the global financial crisis, as this next graph shows.

Source: APRA / RBA / Standard and Poor’s.

Source: APRA / RBA / Standard and Poor’s.Source:Supplied

Those domestic deposits are a safe and reliable way for banks to get funding. But they cost more than cheap global funds.


I’m not saying bank bashing — practically our national sport — should be discouraged. Instead, it should proceed in a targeted fashion, hitting them where they really do have weak spots.

Australia regulates the banking sector reasonably firmly. Our banks are stable, well capitalised and forbidden from merging. They also benefit from government guarantees on deposits. The banks know the Federal Government will bail them out long before they are a chance of going under.

But our banks carry on a range of businesses that aren’t basic borrowing and lending. They provide financial advice, investment banking, and insurance.

All of these are risky pursuits, and in all of them, our banks have become enmeshed in scandal.

— ANZ and Westpac have been caught allegedly rigging interbank rates.

— An NAB employee was caught doing insider trading with ABS data supplied by a friend. (He used his ill-gotten gains to buy an apartment from TV show The Block).

— CBA customers lost hundreds of millions of dollars due to dodgy financial advice.

All these scandals create risk — financial and reputational — that could spill over to the main banking business. Which we, the taxpayer, would bail out in the case of disaster. Essentially, banks are using their extremely secure positions to engage in risky non-core businesses that fatten their bottom line.

The idea we are immune from a financial disaster is fanciful. If Australia is going to encourage large bank profits in pursuit of financial stability, we should discourage, at the same time, banks getting involved in risky side-businesses.

Australia had a major financial system inquiry in 2014. While the inquiry was underway, its head, former CBA CEO David Murray, hinted at the prospect of splitting investment banking from the regular workaday business of deposits and loans (known as retail banking). No such recommendation ever made the final report.

Splitting retail banking off from investment banking could make very good sense. US regulation, known as the Glass-Steagall act, did exactly that with great effect.

As this graph shows, there were scarcely any bank crashes during the years of heavy regulation. Source: The Conversation

As this graph shows, there were scarcely any bank crashes during the years of heavy regulation. Source: The ConversationSource:Supplied

Australia needs healthy, profitable banks, because it needs low-risk banks.

The problem in Australia’s banks is not profits in the core businesses of deposits and loans. The problem is everything else.

Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine. Follow Jason on Twitter @Jasemurphy

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