David Bell, Chief Executive of the ABA, said: “For an organisation that seeks ‘balance’ as part of it philosophy, it produced a polemic that does nothing more than denigrate banks’ contribution to the Australian economy and community.”

“In doing so, it glosses over the fact that Australia’s banks are amongst the strongest in the world, and made only passing and token reference, noting that ‘…..fortunately, the Australian banking system survived relatively unscathed’²”.

“The Australian economy remained strong when others slipped into recession during the global financial crisis, because of good economic management by successive Federal Governments, our strong trading position with growth economies like China, effective regulation supervised by good regulators, and the sound management, strong balance sheets and sensible lending policies of our banks.”

“The Australia Institute ignores the social benefits of successful banks - profitable and well capitalised banks provide finance for businesses and, therefore, keep people employed.”

“The Institute also ignores the fact that banks had to fill the gap created when other lenders were unable to secure funds from the wholesale and securitisation markets.  Fortunately bank balance sheets were strong enough for them to continue lending, during very difficult times.”

On profits

The Australia Institute alleges that banks are profiteering. This is false.

Australian banks have continued to deliver profits but some overseas banks are only just recovering from the global financial crisis and are reporting negligible profits. Some overseas banks have been ordered by regulators to sell off assets to repay debt provided by Governments. Against this backdrop, Australian banks have performed exceptionally well.

The Institute compares bank profits with GDP. It is unsurprising, given the overall contribution to GDP from the finance sector, of around 11%, that the profits of the largest institutions are of the order noted.

It should also be noted that the major banks’ contribution to the national accounts profits measure (Gross Operating Surplus) fell significantly from 2006 to 2009, from 9.5% to 6.4%

It is also interesting to observe that on traditional measures of profitability, such as return on assets (ROA) or return on equity (ROE), there are many other corporates that enjoy higher levels of profitability. The ROA for the four major banks is in the order of 1%. The ROE for the major banks is in the range of 16 to 20%, but other sectors significantly outstrip the banking sector.

On interest rates and bank funding

The Australia Institute alleges that banks are gouging bank customers on interest rates. This is false.

The US sub-prime crisis has affected all Australian banks, increasing wholesale funding costs and forcing increases in interest rates on all lending. 

In the United States, official cash rates have been slashed to almost zero, but because their banks are relatively weak, finance to small business and households is being massively cut back - requiring taxpayers to come to the rescue. The weakness of US banks is having a profound social impact, whereas Australian banks are still open for business – making loans and accepting deposits.

The latest data on funding costs shows that the cost of short-term funding is easing, but the cost of long-term funding still remains high and competition for deposits is very strong.

On competition

Australian consumers have access to very competitive banking markets that deliver good value to bank customers.

There is no ‘monopoly’ over the payments system in Australia as asserted by the Australia Institute.  This is plainly false because, in Australia, no single institution controls the banking market or the payments system.  This demonstrates the author’s lack of understanding about economics and banking if he believes this is true, and undermines the credibility of his report.

Even since the credit crunch which commenced in August 2007, Australian consumers continue to have a choice of around 130 housing loan providers, and the prices they pay. This is an important point to emphasise. After reaching a record low of 206 basis points in early 2008, the net interest margin has now increased to 220 basis points but this is still below the levels just prior to the impact of the global financial crisis.  We’re still at almost half the level of margins that were experienced in the 1990s.

There is a lot of competition for deposits as banks try to secure more of their funding from customer deposits.

Banks are actively pitching for new customers with some very good offers on term deposits and transaction accounts. There’s an offer in the market place at the moment for 8% for a five-year term deposit - way ahead of the cash rate at 4%.