Wednesday, August 13, 2008

Banks Under Pressure To Lower Rates

It seems everyone believes the Australian Banks should lower their interest rates when the Reserve Bank (RBA) does: politicians, financial reporters, borrowers, and yes, the reserve Bank of Australia. It is expected that the RBA will lower interest rates, possibly at its September meeting. Core inflation is expected to fall slightly faster, returning to the 2% - 3% target by mid-2010, as the Australian economy cools. However, economic indicators such as business and consumer confidence measures are falling quickly, and retail businesses have suffered a sharp fall over the last quarter, as interest rates bite into family budgets.

The banks, however, are reluctant. After all, the (US) Federal Reserve has raised interest rates to ... shock, horror! ... 2%. Banks have borrowed overseas money cheaply, and on-sold some of it here at much higher retail rates. The banks will claim they need to keep charging higher interest rates because of "the sub-prime crisis" in the US. Well, yes, Australian Banks did buy packaged sub-prime mortgages. That was their commercial decision because they thought they saw easy profits, and probably failed to apply due diligence. However, most prudent people would question the decision to buy 2nd, 3rd, and 4th-rate mortgages, where the risk of defaults is much higher, as a high-risk, poor investment. That is a decision made by the banks, and they, their executives, and shareholders should suffer. Bonuses should be cut, not maintained and offered because of increased bank fees, and artificially raised interest rates. The Commonwealth Bank has just announced a record profit of $4.8 Billion, a rise of 7%, well above inflation, and despite write-downs for some sub-prime investments.

The ethics of banks, and some bank CEO's, are appalling! It might be time to consider a partially-regulated banking industry again.