It’s rare for a single event of a non-sporting variety to unite the nation, yet the Commonwealth Bank’s decision in early November to lift mortgage rates 45 basis points has resulted in calls from all sides of politics, indeed all strata of society, for ’something to be done about the greedy banks’. We should beware of such calls, however, for the cure may prove considerably more painful than the disease.

People’s anger towards the banks is aroused by three main factors: (1) the banks’ apparently substantial profits; (2) their high fees for minor services and account transgressions; and (3) the sin of ignoring the Reserve Bank and lifting interest rates by more than the official increase. Of these three issues that so preoccupy both customers and politicians, only the middle one is of genuine concern. Although the collective $22bn profit made this year by the Big Four banks seems a lot, as a return on equity employed, it is only about 16%. Such a return is best described as decent, but certainly not outrageous. And as to the RBA’s official rate rises, these have only a passing relevance to the genuine cost of raising funds from a variety of sources so that home loans can continue to flow.

Many of the fees charged by banks are far too high, however, and will probably come down as a result of the recent furore. Probably the most egregious from a competition viewpoint are the mortgage exit charges which at anywhere between $600 and $1000 prevent customers from transferring their loans.

The real risk with bank bashing, however, is not that fees come down a bit (overall a positive development), but that adventurous politicians pass new laws to regulate bank lending and profitability. While it might seem attractive to limit the profit larger banks can make on loans, these same banks are able to source funds relatively cheaply on global markets precisely because they are, well, profitable. All of Australia’s Big Four banks enjoy the highest possible credit rating by the likes of Moodys and Standard & Poors; government inspired policies to limit this profitability could result in a cut to the banks’ ratings, thus leading to more expensive credit and therefore higher interest rates for home borrowers.

One of the great fallacies of modern government most recently perpetuated by Shadow Treasurer Joe Hockey, is that ministers have simple and powerful levers to pull in the event social and/or economic problems are identified. Nothing could be further from the truth. Misguided attempts to curb teenage drinking by taxing alcopops, reduce Aboriginal poverty by sending in the army, stop terrorism by, er, sending in the army and avoid a recession by spending billions on dodgy insulation show not the power, but the limitations of government. As a result, the siren-like calls to ’do something’ about the banks need to resisted, as otherwise the law of unintended consequences is sure to rear its ugly head. Again.

Contact Tom Elliott: MME Capital
(03) 9601 4515 | www.mmecapital.com.au