Thursday, 4 August 2016

Central bank interest rates cuts vs commercial bank profits

From today's Daily Mail:

Australia's wealthy banks are set to hang on to $917 million by not passing on the Reserve Bank's record interest rate cut. The big four banks - ANZ, Commonwealth Bank, National Australia Bank and Westpac - made only modest reductions to their standard variable mortgage rates and gave customers about half of the Reserve Bank's reduction of 0.25 per cent...

It comes after Prime Minister Malcolm Turnbull was left unimpressed and demanded an explanation from the bosses of the big banks for not passing the official rate cut on in full.

"They operate with a very substantial social licence," he said, "They owe it to the Australian people and their customers to explain fully and comprehensively why they have not passed on the full rate cut."

I like his emphasis on "social licence" i.e. government granted privileges.

Also from today's Daily Mail/This Is Money:

Britain's big banks are facing a £1.3billion hit to their profits if, as expected, the Bank of England cuts interest rates on Thursday.

There are fears that the banks could attempt to contain the damage by not passing on the benefit of lower rates to borrowers – risking fury from customers and regulators. Very low interest rates squeeze bank profit margins, so there will be further losses if the 0.25 percentage point cut is passed on to customers.

It's either one or t'other, surely? Unless UK banks are net depositors with the central bank and Australian banks are net borrowers from the central bank?


Dinero said...
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Dinero said...

Banks rarely borrow from the Central bank and so the second reasoning is the closest to the truth of it. With interest on deposits and loans at the CB the CB endeavors to influence the minimum rate for money. As a result of QE commercial banks have a lot of deposits at the CBs.

Mark Wadsworth said...

Din, that was the first possible explanation, not the second. In which the Australian reportage is incorrect, is it not? Bank income would have gone down, not up???

Dinero said...

Yes it was the first explanation.

And yes the income would not be up it would be down.

Dinero said...

however if it influences the rates paid to commercial bank deposit accounts down that would be expenses down.

Mark Wadsworth said...

Din, exactly. So the two effects ought to largely cancel out, which is the most sensible assumption. Ergo both stories are largely conjecture.

James Higham said...

I like his emphasis on "social licence" i.e. government granted privileges.

The art of the euphemism.

Mark Wadsworth said...

JJ, I think it is a veiled threat rather than a euphemism.