David Cunliffe and the opposition parties saying they are “concerned by high interest rates” at a time when interest rates are at historic lows may have sent a signal to some readers that something fishy may be in the air regarding their proposed banking profits inquiry.
While the opposition parties are ostensibly hoping to lower interest rates and / or educate the public about how pricing is set in our banking system, a ‘banking profits inquiry’ would be one of the least efficient ways to achieve either.
Drawing on public concern at the fact that most people don’t have as much money as they used to and are increasingly losing their jobs, our politicians are under pressure to be seen to do something - and it’s always easy to look for someone to blame and break out the time-honoured whipping boy, the bankers.
Rhymes with... ?
See – that easy.
Unfortunately this time, the banks aren’t the bad guys we’d all like to assume they are.
Firstly, the pure fact of the matter is, no matter what this inquiry finds the banks are under no obligation to do anything regarding its findings. The opposition aren’t in government, so they can’t make a law obligating the banks to set a certain profit margin or anything else for that matter.
The Commerce Commission is the correct body for any investigation of anticompetitive practices.
So failing a mass movement of ongoing, organised protest and boycotts, the banks will just look at the report and collectively say to themselves, ‘So what? We can set whatever prices we like. It’s a free country.’
Secondly, the information the opposition parties are searching for is already publically available, if somewhat arcane and not widely disseminated.
The cost of bank funding is a mixture of the local wholesale funding from the OCR, (roughly two thirds), and overseas borrowing from other banks (one third, apart from Kiwibank obviously), with the rates banks have to pay for local customers’ deposits lumped in with OCR borrowing.
The last funding source, bank deposits, has become increasingly significant because of the Reserve Bank’s recent changes to prudential regulations, which have imposed greater liquidity requirements in a bid to keep our banking system stable and resilient to funding shocks.
Translation = banks have to have a larger amount of money in their vaults relative to what they can lend out, which means to be competitive they have offer higher interest rates to savers, which means their costs go up.
Before the new prudential regulations deposit rates used to sit a bit below wholesale interest rates, or the OCR – but now deposit rates sit above the OCR, government bond rates, and swap rates.
(That’s the other side of this story, what you give to borrowers, you take away from savers).
As has been noted at length by the NBR and others both here and abroad, interbank lending rates (the overseas borrowing bit) have spiked through the roof during the credit crisis – if you could even access funding, which many couldn’t – and while they have declined from their peak, still have a way to go before they’ll approach pre-credit crisis levels.
What all this adds up to is a progressive decoupling of the cost of bank funding from the OCR – so its use as a policy instrument has become progressively dulled and the public’s perception that there is a direct link is just plain wrong.
Thirdly, it’s a relatively simple exercise to examine the banks’ balance sheets and see what their profit margins are – the big four are all publically listed companies, and all have to report their revenue and profit in detail.
People have done this already. What did they find? While they are profitable, New Zealand bank’s profit margins have actually declined in the last 12 months, just like most of the rest of the economy.
When spoken to by NBR Mr Cunliffe even conceded that, “There’s no doubt the costs of funding from domestic savings have increased, and there’s also evidence that the cost of funding from interbank loans have also increased in light of the international recession, so that’s why I’ve been careful to say that we’re talking about a prima facie issue.”
If Mr Cunliffe can see that the banks’ costs are what’s driving the lack of interest rate pass-through, what purpose is this inquiry meant to serve?
Well, Mr Cunliffe goes on to argue that “there is a win-win in improving the public’s understanding of the issues, and these are matters that people feel greatly concerned about.”
He’s right about people being concerned, but he yet to explain how an inquiry into banks' profits is the best way of diffusing inchoate public anger at hard times with a simple explanation of bank funding costs - like this article is attempting.
Given the above, for Mr Cunliffe to point to OCR cuts of 575 basis points and complain that only 250 basis points of that has been passed through is just plain disingenuous, and points to a malicious misuse of public funds.
He must have been taking notes from National’s playbook while it was in opposition.
The banks NBR spoke to are keeping mum on the issue until more details are made available, but even when the full scope is revealed they will be careful to play along with the charade and not stoke public anger by showing the contempt they will be feeling towards this nakedly political exercise.