The report from the Senate Economics Committee’s Inquiry into Senator Fielding’s proposal, The Banking Amendment (Keeping Banks Accountable) Bill 2009,  concluded that consumers would be disadvantaged if it was passed.

The Senate Committee wrote: “[the Bill could] ….discourage banks from competing in reducing interest rates, could lead to higher bank fees and/or reduced lending to homebuyers, could raise doubts about the deposit guarantees and so reduce confidence in the safety of bank deposits and could be perceived as politicising the setting of interest rates.” ¹

The committee also recommended that the Reserve Bank and the Australian Prudential Regulation Authority regularly publish estimates of the costs of funds for the banking sector as a whole and bank interest margins. The ABA is keen to consult with Government on the methodology for determining any funding cost estimates.

Claims by Senator Fielding in his media release

The ABA notes that Senator Fielding yesterday issued a media release which claimed that “….homeowners are being ripped off by the big banks by an average of $8 400 a year.”²  The ABA rejects this allegation.

The $8400 calculation is based on the incorrect assumptions that: (1) the cash rate is an accurate measure of the bank’s funding costs (2) mortgage lenders make loans at the cash rate.

The Reserve Bank definition of the term ‘cash rate’ is the interest rate which financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis.³

While movements in the cash rate do influence bank funding costs, it is not the only influence. For example strong competition for domestic deposits has significantly driven up deposit funding costs over the last two years.

Banks’ margins on home loans were today mentioned by Reserve Banks’ Deputy Governor, Ric Battellino, who noted that they have narrowed.

“On the question of cost, margins on standard housing loans have, if anything, narrowed a little over the past couple of years, even for the major banks. Two years ago, the interest rates charged by the major banks on new variable rate housing loans were about 190 basis points above their cost of funds. The margin today is slightly narrower.”⁴