Powered by MOMENTUM MEDIA
subscribe to our newsletter

Banks’ failure to pass rate cut 'not unexpected'

The fact that many Australian banks failed to pass on the full interest rate cut to their customers in August “wasn’t unexpected”, the Reserve Bank of Australia’s new governor-elect, Philip Lowe, has said.

Mr Lowe told the parliamentary standing committee last week that despite the RBA lowering rates to support consumer demand, the major banks’ decisions not to offer the full cut was what the RBA “thought was going to happen”.

However, the governor-elect said he did not believe that it “undermine[d] the monetary policy of the economy”.

He said: “Over many years, we’ve said we’ve taken into account the decisions of the banks in adjusting their margins and setting the cash rates, so I think that remains the case.”

A document Mr Lowe distributed to the board presented information on banks’ net interest margins, average lending rates and the average costs of funding, showing a widening of the margin between the average rate on loans and the banks’ average cost of funding.

Advertisement
Advertisement

“You can see that over time, there’s been a very substantial increase in the share of the bank’s assets that are held in securities [and] securities have gone from 15 per cent of assets to 20 per cent,” he said.

“The reason why that’s happened was [that] the banks had been required, as a result of National Regulatory Developments to home or liquid assets, to make potential liquidity strain. The banks are holding a lot more of these assets and the average return on these assets is a lot less than they get on loans.”

Mr Lowe said that his documentation showed a number of explanations as to why banks failed to pass the cut on to customers, among which was that they were also holding a lot more capital than before and that capital was “quite expensive”.

“That’s holding down in net interest margin[s] and partly [what] I think what’s happened is that [they’ve] compensated for that by charging slightly higher rates on loans.”

“I think it’s important to have the kind of context in which this has occurred,” the governor explained. “There’s been an increase in the spread between the average interest rate paid and received to some extent – to a significant extent.”

PROMOTED CONTENT


He added: “My assessment is that the borrowers have largely born the cost of that, not the shareholders of the bank. I think there is some question about who ultimately should bear the cost of that: the shareholders or the borrowers?”

[Related: RBA ‘not inflation nutters’, says new governor]

Banks’ failure to pass rate cut 'not unexpected'
mortgagebusiness

Are you a new-to-industry broker in the process of growing your business? Then there’s some great news: The Adviser’s New Broker Academy is back in 2021 and will provide you with essential insights into cutting-edge tools, strategies and processes to fast-track to success. Don’t miss your chance to attend. To secure your FREE place, visit newbroker.com.au now!

Latest News

Reverse mortgage lenders have accessed a small fraction of the potential retiree housing market in Australia, according to Deloitte. ...

Pepper Money has priced its second I-Prime deal for the year, upsizing the figure to $850 million. ...

The LMI provider has announced a new CFO following the resignation of its current CFO, effective 24 September. ...

Join Australia's most informed brokers

Do you know which lenders are providing brokers and their customers with the best service?

Use this monthly data to make informed decisions about which lenders to use. Simply contribute to the survey and we'll send you the results directly to your inbox - completely free!

How long do you think it should take to discharge a mortgage?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.