Opinion & Commentary
Aussie banker bashing
Bankers have never been popular, especially in the wake of the global financial crisis, as taxpayers around the world found themselves picking up the tab for bailouts. Australia is no exception, and in recent days politicians across the political spectrum have been savaging the financiers.
However, this time the bankers' supposed sin is not losing money, but making too much. The banks have increased their mortgage lending rates by more than the increase in the Reserve Bank of Australia's official cash rate, the local equivalent of the Fed funds rate. Having guaranteed the banks' borrowing during the crisis, Australian politicians now feel they have the right to tell the banks how to price their lending.
Unlike in the U.S., Australian banks mainly offer floating-rate mortgages. There has consequently been a close relationship between the official interest rate and mortgage rates. Banks typically move their lending rates at the same time as the central bank and by a similar amount.
Ben Bernanke would give his right arm for such a close relationship between the Fed funds rate and U.S. lending rates. It makes Australian monetary policy more potent, since it gives Australia's Reserve Bank governor considerable influence over household disposable income.
However, this has also created a false expectation that mortgage interest rates should only move in lock-step with the official cash rate. That expectation has provided an opportunity for cynical politicians from both the left and the right to launch a populist attack on the banks to divert attention from their own role in driving up the cost of borrowing.
It's fairly straightforward to show that from the borrowers' perspective, the margin banks charge over the official cash rate is irrelevant. That's because the Reserve Bank carefully and explicitly aims its monetary policy actions at the retail and wholesale lending rates. When the spread between the official rate and the lending rates changes, the central bankers simply adjust to keep the lending rates at the right level to supply the appropriate amount of credit for the economy.
For example, before the financial crisis lending margins were narrowing because of increased competition from nonbank mortgage lenders. The Reserve Bank responded by raising the cash rate to bring the lending rates back up to its target.
Australian politicians from both the main parties either don't understand this mechanism, or don't want to let the facts get in the way of their grandstanding. Hence during the financial crisis, Canberra engaged in a Freddie Mac-style intervention to purchase mortgage-backed securities in an effort to drive down lending margins. But even if this had been successful, it would have been offset by the policy actions of the central banks through its targeting of lending rates.
And Australian politicians still seem to believe that they can engineer an easing in credit conditions through subsidies to the mortgage securitization industry. Incredibly, they assume that the Reserve Bank will somehow ignore their attempted interference in monetary policy when it sets the official cash rate. Instead, the two arms of government are working at cross-purposes.
There is no reason to believe that the government's subsidies to the mortgage securitization industry benefit retail borrowers. Yet the government's threatened package of measures to increase competition for the big banks will likely include a ramping-up of these subsidies at taxpayers' expense.
The government's demand that the banks limit increases in their lending rates to those of the official cash rate is effectively an inducement to irresponsible lending. Some of the big banks have full mortgage books and prudently are avoiding taking on additional exposure to housing. Not surprisingly, these banks have the highest mortgage rates on offer. In any other business, using price signals to manage excess demand would be viewed as completely uncontroversial, but Australian politicians have attacked it as greedy profiteering.
Some politicians have suggested new rules to tie bank rates to increases in the official interest rate, effectively reregulating mortgage interest rates. Before 1986, Australia's mortgage interest rates were regulated by a committee of the federal cabinet, leading to the rationing of housing credit. Getting money from the bank under credit rationing was a beauty contest in which the poor and disadvantaged invariably lost out.
Treasurer Wayne Swan has argued in international forums such as the G-20 for a tightening of bank capital regulation, although with exceptions for Australian banks. In a speech last year, RBA Governor Glenn Stevens noted that "on the assumption that most of these regulatory changes go ahead, one effect will presumably be to make the process of financial intermediation more costly."
While Australia's politicians denounce bank profits, they are hardly shy about taking political donations from the banks. What the banks get in return for these donations, apart from public abuse, is far from clear. Perhaps it's time for Australia's banks to stop sharing their profits with those who denounce them.
Mr. Kirchner is a research fellow at the Centre for Independent Studies and a senior lecturer in economics at the University of Technology Sydney.
