Corporate cop Greg Medcraft has a suggestion for the banks – one that he reckons would help their image problem, boost competition and improve transparency.
If they followed his advice and offered “tracker” home loans that moved in lockstep with changes in the Reserve Bank’s cash rate, we could largely ditch the tiresome cat-and-mouse game on mortgage pricing that follows every RBA change, Medcraft says.
Such a change would have many benefits. It could help rebuild public trust in the industry, it might resolve the age-old debate about funding costs and it could make it easier for consumers to compare loans, he said last week.
What’s not to like? Well, quite a bit, if you run a big bank, or even if you regulate one.
Chief executives of three of the big four banks poured cold water on the idea at this month’s banking inquiry.
Medcraft, the Australian Securities and Investments Commission chairman, hasn’t had much support from fellow regulators, either. The Reserve Bank and Australian Prudential Regulation Authority both failed to support his push in public.
That is because some sort of tracker loan could help resolve one of the biggest public gripes about banks in this country – how home loan costs are set.
Mortgages that track some sort of benchmark rate by a fixed margin are common in Britain and the US, and are also offered in parts of Europe.
Yet despite Australia’s very large pile of mortgage debt – $1.5 trillion and counting – they’ve never caught on here. A non-bank offered the products briefly before the global financial crisis, and niche Queensland bank Auswide grabbed some free publicity by launching one last week. The bosses of CBA, Westpac, and NAB told the government’s inquiry tracker loans wouldn’t stack up. Photo: Paul Rovere
The bosses of Commonwealth Bank, Westpac and National Australia Bank told the government’s inquiry that tracker loans wouldn’t stack up because the RBA cash rate is not the same as their cost of funds, which also reflect deposit costs and wholesale borrowing costs.
So, if they were to offer a tracker loan, it would have to be priced at a higher rate than a standard variable mortgage rate, they said. Therefore, they don’t think it would be popular – with the exception of ANZ, which is looking into the idea.
Now, what the banks are saying about funding is essentially true. Their funding costs do vary outside the cash rate, so there are risks in linking loan interest rates to this particular benchmark.
Even so, it is possible to hedge against these risks and still offer a reasonable interest rate of 3.99 per cent, as Auswide did.
Would there be demand for a loan like this? Perhaps. A new survey conducted by Finder.com found 30 per cent of customers would be interested if such a product were more widely offered.
Why then, aren’t the banks keener to even offer some sort of tracker product?
Kevin Davis, an academic and member of the Financial System Inquiry panel, suggests it is because the current arrangements work very nicely for banks.
Davis says Australia is unusual in giving our banks such sweeping power to unilaterally change customers’ interest rates as it suits them. He argues banks should set their lending rates at a fixed margin above some benchmark of their costs, such as the bank bill swap rate (in contrast, Medcraft says they should use the cash rate as their benchmark).
Various other advantages (for banks) of the current system were highlighted by Medcraft when he appeared before Senate estimates last week.
It makes it difficult to compare which bank has the lowest home loan rate, because you never know how your bank’s rates will stack up compared with others in the future.
And it is hard for the public to know if the bank’s funding costs have really changed materially, or if the bank is just charging them more interest to inflate profits.
All this has led to a recurring fight about whether the banks are ripping us off when they move their rates by a different margin to the RBA. A fight, by the way, that in August triggered the government’s banking inquiry.
So, what should be done?
The RBA and APRA don’t want banks forced to offer particular products linked to the cash rate. That makes it unlikely there will be regulation requiring banks to offer tracker loans.
Instead, it would seem a good opportunity for a major bank to step forward and show they are serious about responding to public concerns about the highly profitable mortgage market.
I’d add a final reason why some sort of tracker product makes sense: banks will probably never win the public argument on home loan pricing, anyhow.
For years banks have sworn black and blue that their funding costs are forcing them to make unpopular interest rate moves. And for years successive governments and the media have taken them to task over their response to Reserve Bank decisions.
A bank that offered a competitive tracker home loan would have a ready-made and convincing defence for the next time they are inevitably attacked over their interest rate settings.