Australian banks are bracing themselves for an uncomfortable stand-off should interest rates be lowered again by the Reserve Bank on 7th February.
The reluctance of big banks to pass on the December interest rate cut suggests that their opposition is likely to be more unyielding this time around. The delay in passing on the December cuts to consumers was estimated to be saving the largest four banks close to $5.5 million per day.
Now, banks are set to claim that the European debt crisis is restricting the functioning of global credit markets to drive up costs, and thus restricting their ability to respond. Analysts predicted that banks may only raise $50 billion in term funding in 2012, a third of the amount raised two years ago.
And yet, banks posted record profits in 2011, which shareholders are desperate to retain. Directors are voting in lucrative incentive-related packages for chief executives based on share prices, dividends, and profit retention. The threat to profits has led to a wave of redundancies.
The ability to raise profits is, of course, a success story for banks who have worked astutely to insulate themselves from the European debt storm. This has been possible, in part, by banks relying much less on offshore markets than they did in 2007. The move to domestic retail deposits and longer-term debt, which lessens their reliance on unstable wholesale markets, has restructured their funding to a position of record returns even during a global slowdown.
Banks have also widened their interest margins from the official rate since 2008. They have increased rates beyond official rate rises, and not always reduced them back with official rate cuts.
While banks self-fashion themselves as suffering businesses in a failing global economy, their own actions and strong record of health show their priorities to lie towards profit retention rather than basic self-preservation. It may need a strong show of political, retail, and consumer opposition to ensure that users' needs are served.
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Keith McDonald
Which4U Editor
