The bank debate now seems officially out of control. Increasingly foolish notions about banking are being served up day after day. One example: the developing meme that claims the banks have decided they will no longer be bound by official interest rate policy.
One morning last week I listened to ABC’s Melbourne local radio presenter, Jon Faine, beat up the banking industry’s official spokesman, Steven Münchenberg, on radio (audio here). Münchenberg could well be Australia’s King Of Making Difficult Arguments Sound Reasonable, but Faine is fast turning into Australia’s One And Only Left-Wing Shock-Jock, and the whole thing quickly became pretty awful to listen to. Its worst awfulness was that Faine kept insisting that the banks were now rendering government and Reserve Bank policy impotent. By deciding to react to rising overseas funding costs by raising their rates, he claimed, the banks were saying: “we will decide what’s best for the Australian economy; we won’t let the Reserve Bank decide what’s best for the Australian economy”. “It nobbles the government’s main strategy for trying to in some ways address inflation and therefore control what goes on in parts of Australia”s economic activity,” Faine declared, in a tone that suggested he knew exactly what he was talking about.
If Faine were right, this would be a huge problem for macroeconomic management in Australia. Thankfully, it’s populist blather. As a couple of Faine’s phrases disclose, he has little idea about how or why the Reserve Bank conducts monetary policy. If Faine really believes it …
… let him wait until the Reserve moves rates and then see how far the banks have decoupled from official monetary settings.
The not-very-complicated truth is that the banks’s pricing is influenced by more than one thing, just like prices in most business. My local greengrocer’s prices are mostly dictated by wholesalers’ prices, but if you doubled their wage costs tomorrow, I’d end up paying more for tomatoes and apples. In the same way, official rates matter a lot to the banks, but rates on global markets matter too – because banks borrow a lot of money offshore, and in the process effectively fund Australia’s current account deficit. Banks are now moving rates up because they are paying noticeably more for money, in a global market which is currently nervous about who it lends to.
But the rises are hardly enormous: ANZ’s much-criticised increase amounted to six basis points on mortgages – that is, six hundredths of one per cent.
And of course, if the Reserve wants to nullify the effect of such a rise, all they have to do is make an offsetting change of a few basis points when next they move rates. Reserve governor Glenn Stevens has made this point himself, though I couldn’t quickly find the precise reference. (Münchenberg made this point to Faine too; Faine simply ignored it.)
What’s particularly interesting about the current moment is that Faine is just one of many people talking up strange ideas about banking. I opened up the Business Spectator website a few days after hearing Faine, and found the much-admired Robert Gottliebsen, founder of modern Australian business journalism, arguing a similar point: that the Reserve Bank’s independence is “crumbling” because the advent of overseas funding has weakened its power over rates. I could have missed it, I suppose, but this is not a view of monetary policy that has cropped up in any of the monetary policy or central banking literature that I’ve seen. If it is a problem, it’s been a problem for a while, because the banks have been going overseas for money for at least a quarter-century now.
The dilemma that the Big Four banks really pose, it seems to me, is that they’re a highly profitable oligopoly which has actually boosted its margin in the past few years as banks elsewhere in the world have plunged into chaos. This was, of course, not the way Steven Münchenberg wanted to put it. But crudely benchmarking the Big Four’s long-run profitability against their Australian peers, as Ian Harper did for Banking Day a year ago, suggests that their returns are consistently a few per cent higher than they would be in a more competitive environment. (Note: Ian Harper, who is no fool, disagrees with this reading, arguing bank profits are broadly where they should be. He could be right. There is no simple right way to decide what a company’s long-run profitability should be.)
The Big Four banks’ profitability is a genuine issue for discussion – though maybe not our biggest national problem right now, if only because the banks’ profits are mostly paid out to Australian superannuation funds. But it’s in a way just one version of a broader national issue: Australia tends to have highly profitable oligopolies in key network industries like groceries, banking, energy distribution and telecommunications. The banks get more attention than most because some of us pay them more, and we pay them more because we like to borrow.
A debate on how to deal better with highly profitable companies would be a good thing to have. There are policies available to address that issue. The national temper tantrum we’re having right now about banks reflects little credit on some of the participants.
Update: The Reserve’s Guy Debelle has now addressed this issue in comments made after his most recent speech. As well as confirming that the Reserve agrees with the reasoning above, he makes the point that to the extent the banks’ mortgage rates react to factors other than “official” rate changes, the Reserve’s management gets slightly less precise. But he also makes the point that mortgage rates are just one of many transmission mechanisms for monetary policy (anyone remember business lending? or bank savings?), and there’s always imprecision in the process. Debelle also notes the US circumstance, where most mortgages are written at a 30-year rate. That really might make US monetary policy less effective than Australian monetary policy.
So have the Australian banks’ recent changes to their processes influenced the effects of monetary policy? “I don’t think that has changed materially at all,” Debelle said.
Update 2: Faine followed up at the end of last week by verballing Wayne Swan with the same ill-researched argument. His first question: “Has a Treasurer ever been so impotent, in Australia, in the face of international and other forces?” Swan reacted relatively coolly, saying he “certainly rejected that characterisation” and pointing out that the economy was in fairly reasonable shape.