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.
“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.”
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?”