Australian anger puts heat on bankers

Sir Ralph Norris. Photo / Supplied

It used to be the Bondi bludger. Now it is the banker.

Sir Ralph Norris, former State Housing Commission prodigy and now chief executive of the Commonwealth Bank, has become the Kiwi that Australians love to hate.

The Commonwealth was the first of Australia's big banks to not only lift interest rates after the cash rate rose this month, but to push them higher than the 25 basis points announced by the Reserve Bank.

The fury that followed this move, since repeated by the other majors, has unleashed a storm in which political competition will almost certainly lead to new regulatory reforms, and fuel outrage in such other sensitive areas as executive salaries.

Treasurer Wayne Swan, provoked by a nine-point plan proposed by the Opposition, will announce a package of measures next month.

The Senate economics committee has launched an inquiry into competition within the banking sector, whose hearings - also starting next month - will include the level of rivalry between bank and non-bank lenders, the range of products available and the fees and charges they attract, the ease of moving between lenders, any anti-competitive effects from regulation, and obstacles to the entry of new providers.

Shadow Treasurer Joe Hockey wants, among other proposals, to give the Competition and Consumer Commission more power to investigate collusive price signalling, have the Prudential Regulation Authority investigate risk-taking that potentially conflicts with Government guarantees, and to investigate "monopolistic profits".

The Greens have introduced legislation banning fees charged for automatic teller machines and will introduce another bill allowing banks to adjust interest rates only in line with Reserve Bank movements.

Although the Greens' bills are unlikely to succeed, and the Opposition has yet to frame any real action, the banks have been singed at their fringes by the political heat.

The ANZ and NAB have decided to scrap mortgage exit fees after Government attacks on what it says is a barrier to increased competition.

Smaller lenders have also reported a surge in inquiries from borrowers wanting to switch from the major banks, and ING Direct is offering a A$1000 ($1270) cash incentive to customers who transfer their mortgages across.

But the issue of exit fees demonstrates the difficulty the Government will have in framing effective reforms, without re-regulating a sector that has performed well and remained strong during the global financial crisis.

In 1996 the states agreed on a uniform credit code that outlawed excessive bank charges, including exit fees. The Securities and Investments Commission has had the same power since July but the difficulty in proving a case has been a strong deterrent to action.

The problem for banks - and politicians - is the popular clamour for reform.

Although Australia emerged from the financial crisis far better than most, the suburbs remain under pressure from rising costs and high house prices.

Housing affordability is falling, with the latest figures from the National Centre for Social and Economic Modelling showing that 47 per cent of first-home buyers are spending more than 30 per cent of their income on mortgage repayments. This rises to between 53 per cent and 58 per cent in Brisbane, Sydney and Melbourne.

Against this background, politicians and the unions have been joining wider public anger against executive remuneration, and concern at "excessive" profits.

Banks became the clear target when the Commonwealth opted for a 0.45 per cent rate rise after the Reserve Bank's Melbourne Cup day increase - followed first by silence from the other majors as the storm grew, and finally by similar action.

NAB increased its rates by 0.43 per cent, ANZ increased 0.39 per cent and Westpac by 0.35 per cent.

Anger was further fuelled by pay rises for the Big Four's chief executives: a 23 per cent - A$8.2 million - collective boost this year, according to an analysis by the Age.

At the peak was Sir Ralph's A$16 million package. Supported by the minutes of the Reserve Bank meeting that decided the latest rise, the banks argue that the scale of their interest rate increases is justified.

The Reserve Bank increased rates to pre-empt expected pressures from strengthening economic activity and gradually rising interest rates.

The board said it had also taken into account the rise in lending rates relative to the cash rate in the wake of the global crisis, with the cost of funds rising as debt issued at previous, lower, levels was rolled over.

It said that as a result it expected that banks might lift their lending rates above the rise in the cash rate.

But this argument was challenged this week by the Canberra-based think-tank The Australia Institute, which used analysis of Prudential Regulation Authority figures to support a claim of "gouging".

The institute rejected claims from the banks that funding costs had been rising faster than official interest rates. It said that between the June quarter 2009 and June quarter 2010 the Reserve Bank increased rates by an average 136 basis points but banks' interest costs increased by only 88 basis points.

"The difference can be explained by the fact that the cost of overseas funds is growing slower than the cost of domestic funds, with the fact that the banks rely on billions of dollars worth of zero- and low-interest savings accounts," Senior Research Fellow David Richardson said.

As the heat continued to rise, Sir Ralph this week warned against hasty, populist decisions based on revenge and punishment.

"[This] is the way some politicians play things and, unfortunately, I don't think you end up with the optimal solution," he told ABC radio.