Why banks don't necessarily pass on interest rate cuts

Some customers are annoyed and a treasurer is not happy. But the banks say they are performing a complex balancing act. So what are they balancing?

15.10.2019

Explainer | Some customers are annoyed and a treasurer is not happy. But the banks say they are performing a complex balancing act. So what are they balancing? |

Some customers are annoyed and a treasurer is not happy. But the banks say they are performing a complex balancing act. So what are they balancing?

So was Treasurer Josh Frydenberg this week when he launched an ACCC inquiry into the matter: "There's a pattern of behaviour and the Australian people are fed up."

So, who is right? Are the banks obliged to pass on official rate cuts? Or is it more complicated than that?

At heart, banks are intermediaries, matching people who want money with people who have it – and getting paid for the service.

When a bank writes a mortgage and pays the upfront cost of a home purchase, there are only three major potential sources to get the money.

All three funding sources demand banks pay them interest in return for stumping up their cash.

Like any business, banks' power to maintain their margins depends on the competitive pressures they face – both the number of existing competitors and the size of the barriers to entry of new competitors. Set your margin too high – that is, charge borrowers too much relative to your costs – and borrowers will simply go elsewhere.

A growing proportion of bank deposits are already paying out zero per cent interest. In other words, but for security concerns, depositors may as well have their money under their beds.

One measure of profit – returns on shareholder equity – has shrunk from more than 20 per cent to more like 10 to 15 per cent, on average, for the big four. This is still well above the average for international banks.

So, if you're a bank executive looking to protect profits, but you have limited room to keep paying depositors less and you need to keep attracting new customers, what do you do? You maximise your margin on your book of existing borrowers, by not cutting mortgage interest rates for these borrowers as much – the so-called "loyalty tax".

If you’re mad about your mortgage rate, it's a better idea to get even.

With variable mortgage interest rates in the market with a “2” in front, there’s never been a better time to shop around.

Read more: The Sydney Morning Herald

Quit dropping interest rates you bought property trying to be a millionaire overnight your own fault. Good on the banks! Profit They also do their own forecasting and research. Perhaps the trigger happy RBA should get a hint from the banks across Australia and leave the rates for an extended period of time. The economy would prosper, and give consumers some confidence.

They also do their own forecasting and research. Perhaps the trigger happy RBA should get a hint from the banks across Australia and leave them for extended period of time. Share holders! They are balancing their bank accounts! I just have a simple question which no doubt the banks would find complex. From where do they get their profits?

Thieves there own pockets full of greed these banks The Aldi bags Their profit...

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