Treasurer Wayne Swan and his predecessor Peter Costello have had a glib response to bank bastardry – change banks.
Costello was referring to exorbitant fees and charges. Swan was referring to banks charging higher interest rates independently of the Reserve Bank’s cash rate.
The Treasurers have been condemned for impracticality. The costs and inconvenience of changing outweigh the benefits, particularly as there are only a few of them in Australia and there is not much between them anyway.
Swan must be ruing the day that the previous Labor Government began the process of privatisation of the Commonwealth Bank – the people’s bank, set up in 1911 by the Fischer Labor Government.
At least when the Commonwealth Bank was in Government hands it could hold the private banks in check with competitive pressure.
But now the big five can do pretty much as they like in pursuit of profit. In 2006-2007, the ANZ, NAB, Commonwealth, Westpac and St George Bank reported a 10.7 per cent rise in collective net profit to of $17.9 billion. Westpac alone was up 14 per cent to $3.5 billion.
They have put up their rates without any increase in the cash rate by the Reserve Bank. In the face of such good profits how an they justify it? They blame the sub-prime mortgage crisis. Well, yes, the sub-prime crisis is responsible, but not in the way the Australian banks contend.
As people in the US default on sub-prime mortgages – loans secured by over-valued properties by mainly non-bank lenders to people with poor finances – the lenders have to refinance, thereby making money scarcer and the price of money (interest rates) higher.
But the Australian banks have not been adversely affected to any great degree by what is happening in the US. To the contrary. The sub-prime crisis is making life hard for Australian non-bank lenders – such as RAMS. It means less competition. It means that in 2008 the big five banks can jack up their rates without a loss of market share to non-bank lenders in the way they suffered in the 1990s with people like Aussie Home Loans.
The good old days of low competition have returned for the banks, without even the restraining influence of a government-owned Commonwealth Bank.
Well, the Commonwealth Bank is not going to be re-nationalised, though the British Government is thinking of taking over a failed non-bank lender in Britain.
But a couple of things could be done to pressure the Australian banks. The banks want to maximise profits – if it means lower wages for their employees, poorer service, higher charges and a greater gap between they rate they borrow at and the rate they lend at, so be it. They will do that for as much as the market will bear.
At present the market – the customers – are just copping it. But customers can punish some banks and reward others by moving as much of their business as possible without incurring big transaction costs. It is fairly easy in these days of internet banking. It is easy enough to move all your cheque, savings and credit card accounts from one bank to another and leave the mortgage (the hard on to move) with the old bank.
Banks thrive on cheap deposits. Wages, salaries, professional fees and small-business takings pour into zero or low-interest cheque and savings accounts every day. A bank would not like the loss of the $60,000 to $150,000 which the average working Australian put through their bank account each year. Nor do they like losing credit card interest which so many customers incur despite their best intentions.
Moving accounts would have an effect, even if the mortgage stayed with the old bank because mortgages usually get paid out before full term when people sell to move. So the old bank would be on notice of gradual customer loss.
In the meantime, state and federal governments could do something about mortgages to make them more easily transferable.
At present, someone moving a mortgage faces bank and legal fees and state or territory land registration fees – both for removing the old mortgage and registering the new. All up it is several hundred dollars. The maximum difference between the five banks’ variable interest rate is only about 0.1 per cent, so it might take a couple of years to make the move worthwhile and in that time your new bank might easily raise its rates by more than your old one.
If Treasurer Swan is serious about people swapping banks for lower mortgage interest, he should talk to the states and territories about creating a new form of standard transferable residential mortgage – one that can be assigned from one bank to the other at the direction of the lender without involving Land Titles Offices.
If it is good enough for one bank to lend a certain amount on a house it should be good enough for another bank to take over the debt without a new valuation.
Sure, there would be some risks, but banks have been balancing risks against costs of comprehensive valuations and the monitoring of repayment capacity for decades.
The difficulty for Swan is that before the election Labor concentrated on keeping household costs, including the costs of mortgages, down. But an Australian Government of either complexion has little power to do much about it. And the events of the past couple of weeks suggest that it has even less power than was thought before the election. Not only can the Reserve Bank jack up rates independently, we now see that the commercial banks themselves can increase their rates irrespective of what the Reserve does and get away with it.
Australians are paying again for the sale of the Commonwealth Bank. It was sold between 1991 and 1996 at grossly lower than true value. At the 1991 float of 30 per cent of the bank, the Government sold shares at $5.40. They were 18 per cent higher two days later and are now more than 10 times that value, and that does not take into account dividend payments. A raft of middlemen fattened their wallets in the remaining two floats.
That aside, Australians have also lost a bulwark against rapacious behaviour by oligopoly of the few commercial banks for which they are now paying.