It is often said to own your own home is the Australian dream. But for the vast majority of Australians, we cannot get there without the help of a bank.
Indeed, more than three million Australian households have a mortgage, with the Big Four banks having around eighty per cent market share of what is now a nearly $2 trillion residential mortgage market.
Australians rightly expect that when they purchase the biggest asset of their life that lenders will compete vigorously and fairly, enabling them to secure the best possible deal.
What they do not expect nor appreciate is when the big banks capitalise on their market dominance and their customers’ loyalty and refuse to pass on in full rate cuts by the Reserve Bank.
But that is exactly what has been happening. Since June, the Reserve Bank of Australia has made three 25 basis point rate cuts, sending interest rates to a record low of 0.75 per cent.
Only an average 57 basis points of the 75 basis point rate cuts have been passed on to customers by the Big Four.
In some cases, the banks have delayed the changes, taking up to twenty days to lower their rates. In contrast, a number of small lenders have moved quickly, passing on the rate cuts in full.
If the big banks had passed on the recent rate cuts in full, a family with a $400,000 mortgage would be paying around $2,200 a year less in interest payments. This compares to the $1,680 they are saving that they are currently getting from the 57 basis point rate cut. In other words, families would be $519 better off if the banks had passed on the rate cut in full, not just a part of it.
The banks have left themselves open to the charge that they are putting their profits before their customers.
By not passing on these recent RBA rate cuts, the big banks have boosted their bottom line by around $570 million. Unfortunately, this is the kind of behaviour the public have come to expect from the big banks whoever is in office.
Between 2008-2013, when Labor occupied the Treasury benches, there were fourteen rate cuts and only five were passed on in full.
As the Productivity Commission observed last year, “the consistently high returns of Australia’s largest financial institutions are over and above many other sectors in the economy and in excess of banks in most other developed countries post GFC”.
Nobody begrudges a profitable business, indeed, we want more businesses to be so. However, the funding costs of the banks have “declined across the board” and are at “historical lows”, according to the Reserve Bank of Australia.
This has led the RBA to say that the rate cuts should be “fully passed through”. The fact that the big banks are ignoring the RBA is of concern.
It is against this backdrop that the Morrison Government is directing the ACCC to conduct a review of the pricing of residential mortgages and report back with its interim findings by the end of March next year.
Using its compulsory information gathering powers the ACCC inquiry will look at three particular issues.
First, the prices charged to consumers for residential mortgages including the different prices paid by new and existing customers and the difference between the advertised rate and the actual rate paid by customers.
Second, how the banks make pricing decisions including passing on movements in the official cash rate taking into account changes in the cost of funds.
Banks secure their funds from a range of sources, with around half of their funds coming from depositors.
This requires them to balance the interest of lenders and depositors.
Three, investigating what barriers may exist, for example unnecessary red tape which prevents borrowers switching to other lenders if they wish to do so.
In recent days, we have seen the Labor Party revert to form and call for higher levies and taxes on the banks because for Labor, it doesn’t matter what the question is, the answer is always higher taxes. However, the Government believes the solution lies in more competition transparency, better information and empowering consumers.
This is why the ACCC is being tasked to undertake this inquiry and this is why APRA has granted a number of new banking licenses in recent years, and this is why we have passed through the Parliament the Consumer Data Right legislation.
The consumer data right is a measure which will allow consumers to securely transfer their banking data to another lender in order to get a better priced deal.
Australia’s financial system is a source of great strength and the lending provided by our financial institutions enables our economy to operate.
However, Australian customers expect and deserve that their banks will do the right thing by them and in the process, pass on interest rate cuts by the Reserve Bank which reduces borrowing costs for Australian families on their residential mortgage.
This ACCC inquiry will help achieve this important end.
JOSH FRYDENBERG IS THE FEDERAL TREASURER.