It is important to note that, despite contrary assertions, bank interest margins remain at near record low levels and solid, profitable banks have helped Australia’s economy weather the effects of the global financial crisis.

The overall net interest margin for banks is around the same level as just prior to when the global financial crisis started in August 2007. Even the current levels are very low in terms of historic data.

Steven Münchenberg, Chief Executive of the ABA, said: “While margins for various lending products and amongst institutions will inevitably vary, overall, the margin earned on total bank activities is still extremely low by historical standards. For this reason, I disagree with the Prime Minister’s assertion.”

“It’s important to note the Reserve Bank is measuring margins across total bank operations – that means business loans for both large and small businesses, home loans and personal loans – secured and unsecured, and banks’ Treasury activities. I think this measurement is being interpreted incorrectly – it’s not just about home loans.”

The Reserve Bank recently made comments about margins on home loans which should reassure Australians who are working hard to pay off their homes.

“Margins on variable rate housing lending relative to bank funding costs have actually declined a little over the past two years. The margin between the standard home loan rate and the cash rate has indeed increased, but with banks funding costs rising materially more than the cash rate, the overall margin has declined.”¹

Funding pressures

The Reserve Bank noted in yesterday’s report that since the credit crisis commenced, banks have faced continual pressure on their cost of funds.

The three sources of funding: deposits, short-term funding, and long-term funding have all contributed to this pressure, although short-term funding is starting to ease. 

Mr Münchenberg said: “Deposit costs are very high in historic terms and it is expected that competition in this area will remain strong, and long-term funding is still very expensive. This is a problem because as cheaper long-term funding sources reach maturity, they need to be replaced with funds that are much more expensive.”

“This is why we have seen banks move their rates beyond Reserve Bank cash rate movements. Under normal circumstances, cash rate changes have been closely linked to market interest rate changes.  However, global events have had a greater influence on market rates.”

Business loans

It is important to note that the Reserve Bank article showed that there had been re-pricing of business loans which the ABA said is appropriate given that these loans are riskier than home loans.

History has proven that small business enterprises have a higher probability of default compared with retail home loan customers.  A higher risk margin is therefore required on business loans to cover this increased risk. 

The difference between the home loan rate and business rates which are secured by residential property is a direct result of the higher probability of default experienced by the banks in the small business sector. 

Mr Münchenberg said: “We have to remember that it was irresponsible lending in the US that was the trigger for a lot of the global financial problems. And one of the reasons why Australian banks avoided that was because they are responsible lenders.”

“I have heard for some time complaints about a lack of credit being available to small business, and I don't doubt that at a time when money is tighter than it was a few years ago, there will be businesses out there that'll find it more difficult to get money.”

“This does not necessarily mean that banks have reduced their lending, but that some alternative financiers have left the market or tightened their lending restrictions in certain segments.” 

“But equally, it's by lending money that banks make money, so it doesn't strike me as being particularly logical that banks would be deliberately holding back from lending to viable businesses.”