As the world tunes into the Rio Olympics, politicians in Canberra have turned their attention to another favourite sport of Australians: bank bashing.

This latest attack on the banks was prompted by last week's interest rate cut by the Reserve Bank of Australia and the subsequent decision by the major banks to pass on only some of the decrease to home borrowers.

We all enjoy a bit of moral outrage and it undeniably plays well with the voters, but curtailing the banks' control of their own destiny ultimately carries grave risks for the economy of Australia - and New Zealand.

In New Zealand, the vast majority of those with a mortgage have fixed interest rates, but across the Tasman about 80 per cent of mortgages are floating rate loans, so interest rates are a hot button issue. Add to that the common misconception that mortgage rates should move in lockstep with the RBA's official cash rate and the banks are in for trouble.


The Turnbull Government has responded by announcing bank chiefs will have to front up to Parliament once a year to explain themselves and answer what are sure to be self-serving questions from headline-seeking politicians.

That in itself might not be a bad thing if it is limited to a few tough questions, but the move is part of a worrying trend that could lead to tougher regulation of banks.

So far Prime Minister Malcolm Turnbull has resisted calls for a Royal Commission into the banks (Opposition Leader Bill Shorten is agitating for one) but with a majority of only one seat in Parliament he might find it hard to resist this in the future.

One of the reasons Australia and NZ could sail through the global financial crisis relatively unscathed was we had strong banks (all the major banks, bar Kiwibank, operating in NZ are owned by Australia's Big Four).

We watched on television as some bank customers in Europe and North America formed long queues in a rush to withdraw their savings. Meanwhile, none of our banks even needed a government bailout like so many did abroad.

The banks argue they couldn't pass on the RBA's entire 25 basis-point cut because their cost of funding - what they have to pay for the money they lend to home buyers - is too high. They always say that, the bank bashers say. They do indeed, but that doesn't make it any less true.

Unlike the banking systems in most other parts of the developed world, Australia's banks lend more money than they collect in deposits. In fact, only 60 per cent of the money they lend to home buyers comes from local deposits. The rest they have to borrow from overseas and overseas lenders don't drop what they charge us just because the RBA has lowered interest rates.

In fact, at the same time as the banks last week held on to some of the RBA's rate cut, they increased some of their deposit rates, in an attempt to gain more domestic deposit funds (and undoubtedly to try to win a bit of positive PR as well).


On top of this, from 2017 banks will have to meet higher capital adequacy requirements. Essentially, they will have to hold more money or assets in reserve for every loan they make. This will make loans more expensive.

The risk is that by cracking down more on the banks - such as by making it harder for them to set rates - we impair their ability to respond to market forces and reduce their support from shareholders, and thus ultimately weaken them. Banks need to be in charge of their own destinies. They are better placed than anyone to make the decisions that will ensure they stay strong and should be allowed to do so.

The GFC bit so deeply in Europe and the US because their financial systems seized up and they virtually stopped lending. In Australia and NZ, our banks continued to lend to businesses and home buyers. This kept our economies ticking along.

In many ways, the Big Four banks are their own worst enemies. Some of them disgraced themselves by inflating profits from manipulating the bank bill swap rate, which is used to price many loans to customers.

Cynicism from the public and politicians is understandable and it would be easy - and popular - to say the banks deserve everything they get. But we need to rise above this and recognise we need strong banks. Or next time the world is struck by a financial crisis we might not have the escape we did a few years ago.