BBSW rigging doesn't hit mortgages says David Murray

Australian Financial ReviewJun 10 2016 10:43 PM

Jemima Whyte, Patrick Durkin, James Eyers

The head of the government's financial system inquiry David Murray has debunked Labor's claim the alleged manipulation of the bank bill swap rate hits every home loan mortgage making it the biggest financial crime of its type in Australia.

The Australian Securities and Investments Commission chairman Greg Medcraft said on Friday that homeowners had not been directly affected by the regulator's claims that three of the major banks rigged the key benchmark interest rate on multiple occasions between 2010 and 2012.

Lawyers say wholesale investors and corporates are the potential victims. Working out their losses is complex because ASIC alleges the three banks both raised and reduced the BBSW on 110 separate occasions, potentially netting out any pricing impact.

Labor is trying to whip up support for a banking royal commission as it attacks the government for protecting big business by arguing that millions of Australians have been directly hit by the alleged manipulation of the BBSW by ANZ Banking Group, Westpac Banking Corp and National Australia Bank. An action against Commonwealth Bank is expected.

Opposition leader Bill Shorten on Wednesday said the alleged rate-rigging as "more than the scandalous tampering with a $1.7 trillion market", describing it as "a cancer eating away at the trust and confidence Australians have in their banks". The bank conduct was "a disgrace and nothing less than a royal commission will do," he said. 

"Every mortgage, every home loan has potentially been rigged by Westpac and that is what the charges being made by the banking regulator is," Labor senator Sam Dastyari, who has been investigating banks for cultural failings in their financial planning businesses, said on April 6, adding "this is potentially the largest financial crime of its type ever in Australian history."

But speaking to AFR Weekend, Mr Murray said the cash rate - which is set by the Reserve Bank of Australia - has the greatest influence on pricing mortgages.

"It is wrong to allege that the home loan contract is linked to the bank bill swap rate," Mr Murray said, adding politicians have "been strident in demands that [banks] should respond to the RBA cash rate" by passing through its reductions to their own customers.

Determining the cost of funding for banks is complicated and pricing comes from a variety of different sources which can be interlinked. Typically, instruments priced directly from the BBSW - which is itself is driven to a large extent by the cash rate - are corporate loans, including to the banks themselves, and various swaps and options contracts.

"Home loan interest rates, as best I can recall, have never been quoted as a margin over the bank bill swap rate," Mr Murray said. "Much business and corporate lending is, however, quoted this way.

"Home loans are priced off a quoted rate by each institution, generally a standard variable rate. The spread between that and other benchmark rates varies with competition, discounting and the weighted average cost of funds of the banks. Their cost of deposits responds mostly to competition for term deposits and market conditions for debt issuance."

Greens senator Peter Whish-Wilson - another proponent of a banking royal commission - this week questioned whether the banks' alleged actions were illegal. "Is it illegal? It's a good question. Let's find out, it's certainly unethical," he said.

Mr Medcraft rejected Mr Dastyari's claim the BBSW impacts everyday home loans and mortgages, but said it does directly impact some retail investors, including self funded retirees who make up the bulk of the $45 billion ASX-listed hybrid market. He said it can also indirectly impact bank financing such as consumer credit card rates.

"BBSW is used in wholesale and retail markets," Mr Medcraft told The Australian Financial Review on Friday.

"In wholesale markets, outside those who set the rates, it is used by corporates in terms of borrowing money. It's referenced on securities at a floating rate, so pension funds, investment funds and other fixed income securities and it is also used directly for example on things like hybrids which are referenced using BBSW.

"In terms of BBSW and its indirect impact, if you are a finance company and lending short-term to retail, then clearly that reflects your cost of funds and your funds plus a margin is what you lend people."

ASIC has been encouraging the banks to resolve the matters before going to court by paying a fine and admitting liability, but the banks are understood to be wary about settling the cases due to the prospect of class actions by victims. ASIC believe the banks' fear is misguided because the quantum of loss is too difficult to calculate for class action investors.

Senior litigation lawyers and litigation funders agreed it will be hard to work out who had lost from the alleged manipulation of the BBSW, but they say they are nevertheless investigating potential cases for compensation.

The country's largest plaintiff law firm, Maurice Blackburn, is investigating a class action against the banks which principal Andrew Watson said was focused on losses sustained by wholesale investors and potentially corporates rather than retail holders of mortgages or credit cards.

"If banks were making profits from unlawful conduct, that means there will be losses to people," he said.  ASX-listed litigation funder IMF Bentham investment management Ewen McNee said market manipulation was never without victims. "If the rate has been manipulated unlawfully and banks successfully manipulated it to boost their own profits, then someone has to lose,: he said. "It's a zero-sum game. It may be hard to identify the victims, and hard to quantify the losses, but it's not victim-less."

Mr Medcraft, whose term was extended for 18 months in April, met briefly with Prime Minister Malcolm Turnbull on Thursday night, who told him to "do my job and be the tough cop on the beat".

Mr Medcraft met the NAB board this week, including chairman Ken Henry and chief executive Andrew Thorburn, to discuss the potential settlement of the case.

The cases carry a fine of $1 million for each transgression, which suggests a possible total fine of more than $50 million for NAB, $16 million for Westpac and $44 million for ANZ.