Working in tandem with researchers at The Conversation, Swinburne Business School’s professor of economics, Abbas Valadkhani, has analysed the profits that Australia’s major banks made on home loans by delaying cuts in interest rates (as announced each month by the Reserve Bank of Australia).
According to their research, in August 2016, ANZ made $6.9 million on owner-occupier and investor home loan assets by delaying their rate cut by nine days, Commonwealth Bank made $22.6 million for delaying their rate cut by 16 days, NAB made $10.2 million for waiting 16 days before cutting, while Westpac made $28.2 million by delaying interest rate reductions by 20 days.
The figures were calculated by taking APRA statistics on the banks’ total housing loans, multiplying that figure by the bank’s interest rate, dividing that figure by 365 and multiplying the final number by the number of days the banks ‘delayed’ their rate cut.
RBA a 'toothless tiger' if banks don't respond to cash rate
“My objective is to highlight what is happening in this important industry, seeing as they hold 83 per cent [of the home loan] market share … I want to highlight how much they are making so they can be brought to account,” Mr Valadkhani told Mortgage Business.
“I didn’t come up with this idea just yesterday, I did some research in 2011/2012 and if APRA, the ACCC, or the RBA, or any other government agencies, took those results seriously in 2012, then we wouldn’t have so many victims of poor insurance, superannuation, and financial planning advice,” he added.
“My research showed that I knew these injustices were happening in the banking industries back then — and if we could have done something about this back then, it would have saved a lot of headaches for the individuals, for the government, even for the bank themselves. But we've let them get away with it, and like everyone else, they try to maximise their profit and when the cat is away, the mouse will play. So if we don't monitor them, this is what happens.”
Touching on the fact that the banks currently aren’t passing on the RBA’s full interest cuts, he warned of potentially catastrophic repercussions.
Mr Valadkhani said: “Just imagine if the banks, hypothetically speaking, don’t respond to changes in the cash rate, the RBA becomes like a toothless tiger.
“What is the use of monetary policy if it becomes totally ineffective? If banks don’t change their interest rates, we will run out of ammunition — the cash rate is already at a historical low — and we only have a limited opportunity to cut the cash rate [as it is already at 1.5 per cent]. Those limited opportunities are wasted by the banks if they do not pass it on.”
Building societies and credit unions 'providing better deals'
The economics professor has previously analysed the monthly data (2000-2012) for 39 bank and non-bank financial institutions including seven building societies, 15 Australian-owned banks, three foreign subsidiary banks, 13 credit unions, and one major mortgage broker. He found the mortgage interest rate spread of all lenders rose after the 2008 global financial crisis, in varying degrees.
In general, however, the professor argued that most building societies and some credit unions can offer more competitive home loans than banks.
Mr Valadkhani said he hopes his research will “highlight that [people] can miss so much by not shopping around” for mortgage rates.
He said: “Financially-educated people may shop around and approach building societies and credit unions for better rates, but some people trust banks, they're not very adventurous so I wanted to highlight that [one] can miss so much by not shopping around.”
The professor added: “When I argue that most building societies and some credit unions are providing better deals for borrowers, that is based on around 15 years of data — it’s not a snapshot.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.