Monday, January 26, 2009

Banks, CEO's And Politicians

Originally posted 7-Oct-2008 at

Today (7-Oct) the RBA lowered the Australian cash rate by 1%. Late today, the 4 main banks indicated they would lower interest rates by 0.8%. The main focus of the media, and politicians, has been on mortgage interest rates. It remains to be sen whether the banks lower personal loan rates, and especially credit card interest rates. The Australian Stock exchange finished higher, rising rapidly after the announcement.

Meanwhile the Prime Minister Kevin Rudd and Treasurer Wayne Swan have been rather defensive of how much of the rate cut should/could be passed on by the banks, but still roll out the spin about “working families” and “good for business” - they could be Howard clones! The Oppsition, led by Malcolm Turnbull and Shadow Treasurer Julie Bishop can indulge in populist press releases calling for the “full interest rate cut” to be passed on to consumers. They don’t have to be responsible, and seem willing to abandon economic responsibility for a quick, populist, tabloid headline. Labor also did as much when in Opposition.

Australia’s “big-four” banks - CBA, NAB, Westpac & ANZ - are 4 of the 18 worldwide banks that have a AA credit rating. They have good market capitalisation & deposits, and so are well-placed to weather the global financial crisis. But they are not immune, and yet Malcolm Turnbull has called on the banks’ CEO’s to justify why they won’t pass on the full rate cut. As a former investment banker, he knows that is an unreasonable request, and that the banks and the Government can be painted as the “bad boys” when they don’t. Financial journalists, of course, have better understanding and report that banks have had to pay 0.75% more for money in the last 3-4 weeks - banks don’t want to lend to each other, or can’t because of they are overseas banks in parlous circumstances. They have previously been lending to Australian consumers at full rates money that they borrowed from overseas at minimal rates.

Don’t feel too much sympathy, though. They recorded record profits this year, except for the ANZ, which recorded a loss after writing down subprime securities, and they increased rates by 0.5% or more than the rises from the Reserve Bank. Thy will still make a significant profit, and their CEO’s will still put out their hands for a substantial bonus!