02.The banking sector
Big four bonuses
Australia’s big four banks have been the major beneficiaries of our record levels of mortgage debt. Not only did they avert the disasters that befell their international counterparts during the GFC, but they actually managed to increase their market share.
International agencies such as the IMF extol the performance and stability of the Australian banking sector. However, the IMF also warns that the high level of bank concentration could pose a risk. “The four major banks are systemically important, which means difficulties in any one of them would have severe repercussions for the financial system and the economy.”
But we don’t necessarily need the IMF to inform us of the costs involved in a highly concentrated banking system. The big four banks have been consistently failing to pass on RBA rate cuts to Australian mortgage holders, as CHOICE frequently highlights. The banks regularly cite wholesale funding and the increased cost of Australian resident deposits – that is, our bank accounts such as term deposits – as the reason for their inability to reduce lending rates, and in its March 2012 bulletin, the RBA supported the banks’ argument for increased funding costs.
However, as interest rates on our savings accounts have started to fall, the idea of the banks cutting lending rates independently of the RBA has been gaining momentum. Upon announcing another year of record profits, Commonwealth Bank chief executive Ian Navrev conceded that an independent rate cut is plausible, while UBS analyst Jonathan Mott says it is inevitable.
Several banks including Westpac, St. George and ME Bank have cut their fixed rate mortgages. However the headline grabber will be if one of the big banks drops its standard variable rate independently of the RBA. Small lender BMC Mortgage has led the way by cutting its standard variable rate by 0.1%.
Down with debt
Australians haven’t been ignorant to the woes of the Western world, and we’ve been doing something about it.
We’ve been saving more and gradually reducing our debt levels. Since the height of the Great Recession, Australian households have been among the highest savers in the western world. Similarly, our total household debt has been gradually declining since its peak in 2006, and roughly half of Australian households are ahead on their mortgage payments, which is high compared to many other countries. The RBA estimates that Australian households are, on average, about one-and-a-half years ahead of scheduled repayments, which provides a significant buffer should our incomes take a hit.