Reserve Bank boss defends rate rises

Australian central bank Governor Glenn Stevens. Photo / Getty Images

The boss of the Reserve Bank of Australia has stood by the actions of the major banks during this month's latest round of mortgage rate increases, saying banking is not like a normal business.

Central bank Governor Glenn Stevens was peppered with questions on the banks during his interrogation by federal parliamentarians on Friday - aside from their usual quizzing on the economy, the international climate and interest rates.

The major political parties want to encourage banking competition in an attempt to guard against excessive interest rate rises by lenders in the future, but Stevens said this was only good for customers to a point.

"Beyond that point, more competition isn't good, because bankers get left to do things which ultimately do a lot of damage," he said.

"Competition that pushes down lending standards, ends up lending money to people who really shouldn't get it. That's not a good thing."

The Reserve Bank unexpectedly raised the cash rate by 25 basis points early this month, triggering much larger increases from the big four banks. in the following days.

ANZ, Commonwealth Bank, National Australia Bank and Westpac raised their standard variable mortgage rates by between 35 and 45 basis points, blaming rising funding costs.

These rate increases came at a time when the four banks collectively were making record profits.

House of Representatives economics committee chairman Craig Thomson held up a chart during the twice-yearly Reserve Bank hearing, showing the increasing profits of the country's biggest home-lender, Commonwealth Bank.

But Stevens said bank profit growth was no different from other large corporations.

"If my choice is between banks with good profits and banks with no profits, I would choose the former every time."

He also pointed out that banking was different from other forms of business, and the failure of even a small financial institution was disruptive.

As such, banks were supervised intensively by the Australian Prudential Regulation Authority - regulation that was much more intrusive than on the average company.

"Banking is not just like any other business," Stevens said when asked if the big four banks were too big to fail.

"A bank failure, even a not so big bank, isn't just like the failure of another business, where someone else comes in, buys the assets and everything else keeps going."

Stevens said the central bank board had expected the over-sized rate increases by the banks.

He defended their heavier reliance on deposit-taking to help fund their lending needs, saying wholesale funding had become "unstable and risky" since the global financial crisis.

He said Australian banks should have no trouble achieving capital requirements set out in the new international regulatory framework agreed at the G20 leaders meeting this month.

But while they were close to these capital requirements, liquidity standards were an issue because there wasn't enough government debt in Australia. The new standards require banks to hold more in the way of government securities as a high-quality liquidity buffer.

But Stevens corrected reports that Australia had been exempt from such standards, saying negotiations are continuing on how it meets its requirement in a different way than the average country.

- AAP