Who are the banks really screwing on interest rates?
26 September 2016
Michael Pascoe
Who are the banks screwing over most on interest rates? You probably think it's home buyers or credit
card users, but you'd be wrong.
In both of those cases, if someone is paying high rates it's most often their own fault. Generally, they
chose to do so by being too lazy to shop around and negotiate on a mortgage or, with credit cards,
because they have no idea of their own financial habits.
And it's certainly not big business which increasingly has the option of raising funds through the bond
market to keep their bank finance cheap. The mob really copping it is small business. The margin over
the cash rate banks charge small businesses soared when the GFC hit and has stayed high.
On Thursday Reserve Bank governor Philip Lowe slipped the House of Representatives economics
committee a pack of 14 graphs with which to batter the chief executives of our four big banks when they
turn up for their hearings next month.
It looks like at least one of the committee members, Craig Kelly, the Liberal member for Hughes, was
quick to zero in on the small business case. As the sixth graph in the pack shows, the RBA's estimate of
the margin over the cash rate banks were charging small businesses wasn't much more than that for the
banks' advertised standard variable home loan – until the GFC hit.
That's when the spread widened and is now about 100 points above the advertised standard home loan
rate and about 200 points more than what the average home loan borrower actually pays. Dr Lowe said
that, since the GFC, banks' spread over the cash rate for mortgages had risen and by an even larger
extent for small business loans.
"In the middle of the crisis the banks repriced the credit risk and charged higher credit risk margins, so
the small business rates went up by even more than the mortgage rates and that differential has been
maintained," Dr Lowe told the committee.
Mr Kelly subsequently asked if the credit risk for small business was underpriced before the GFC or if
things had changed that made the risk greater.
Dr Lowe said: "That would be a good question to ask the banks. My take would be that it is
primarily the former, that there was some underpricing of credit risk before. The banks found going into
the financial crisis that their credit losses on many of these loans turned out to be larger than they had
previously thought, and they judged that they were underpricing it, and they moved quite early on during
the financial crisis to reprice the credit spreads they charge over the indicator rates on many small
business loans. Whether they have gone too far or not …
Mr Kelly: "Do you think that is a good question to ask, though?"
Dr Lowe: "It is a very good question."
Mr Kelly: "Also, wouldn't a lot of those small business loans also be residentially secured? I
am struggling to see, if they are residentially secured, where there would be such a
significant increase in the credit risk that would require such a significant repricing."
Dr Lowe: "Well, the probability of default might be higher, but the security in the house gives the
bank protection against losses – you are right. I am afraid I cannot really help you any more other
whether it should now be unwound – it is a good line of inquiry."
Mr Kelly: "So, that is an area of inquiry that we should pursue with the banks for a greater explanation of
why that has actually occurred for small business lending?"
Dr Lowe: "It is entirely up to you, but it seems to me a fruitful line of inquiry, yes."
In other words, skitch 'em, Craig.