Banks Decoupled from the RBA

[BradK]

Hi,

I was wondering what the implications are for the comments by the NAB early last month about Australian banks now 'decoupled' from the direction of the RBA.

What are the implications?
Will they pass on interest rate cuts? (British banks don't seem to at the moment)
If they dont tie the line, will they just cop some greater regulation?

Are central banks becoming redundant?

In short, what the #($* is going the (#I*$% on??

Brad

 

[Macquack]

Hi,

I was wondering what the implications are for the comments by the NAB early last month about Australian banks now 'decoupled' from the direction of the RBA.

"Decoupling" in banking lingo means " the Reserve Bank can go and get ****ed".

NAB's boss of retail banking, Andrew Thorburn, told The Daily Telegraph that mortgage rates had "permanently decoupled" from the RBA's cash rate, leaving banks to do as they wish.

John Symond, boss of Aussie Homeloans, is predicting that the big banks will exploit the lack of competition caused by the credit crunch and hike up rates and fees.

"Margins are going to widen to try to make up for losses on bad debts plus the increased cost of funds. The credit crunch has cut off the main source of funding to non-bank lenders, and that means the big banks have the market virtually to themselves

My take on the "credit crunch" is that it was a controlled shake-out of the non-bank financial institutions.
Non-bank lenders are constrained by their inability to create credit of their own. These pests were "white anting" the big banks and needed to be exterminated.

If they dont tie the line, will they just cop some greater regulation?

I dont think so. Governments worldwide are scared of big banking institutions and their power to disrupt the economy.

Are central banks becoming redundant?

I think so. Since deregulation of the banking industry, a large degree of the Reserve Banks powers have diminished (eg control of the aggregate money supply).

Finally, another opportunity to post a favourite Thomas Jeffersen quote -
" If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. "

 

[2020hindsight]

:topic
well the old bloke down the road reckons that Govt should be responsible for the sort of decisions the RBA makes. i.e. that the Govt and the RBA should be "coupled" again. Too easy to blame the (unelected) RBA for screwing things up etc.

 

[Julia]

Interesting that you should raise this, Brad. I've just read today's edition of "Money Morning" and they are saying essentially that the RBA is redundant.
Does anyone have a contrary point of view?

Eighty Percent of Respondents are Morons

Firstly, on an ignorant note, we saw a poll in the Herald Sun here in Melbourne this week. A poll that made a swift and brutal deletion from the sum total of human intelligence.

Something like eighty per cent of respondents voted that Australian banks should be banned from raising interest rates outside the RBA’s adjustment. Splutter.

The graph below shows the market interest rate (blue), versus the RBA’s target cash rate (pink) that you hear so much about.

Sorry, the graph didn't copy.

Banks raise funds on the open market. The open market in that graph is the blue line. Their funding costs depend more on the 90-day bill rate than the RBA’s cash rate.

So when a bank raises interest rates…it’s doing that because it’s concerned about higher market costs. Not because the RBA has raised rates. Forcing a bank to copy the RBA’s rate movement is a bit like forcing Grant Hackett to swim in the slow lane. He doesn’t belong there. And banks deserve the freedom to foul up their own business on the free market.

Something even more interesting you can take from that graph…the RBA’s interest rate movements actually follow the short-term market interest rate. At a distance too. The market rate always moves before the cash rate does.

Do we need a central bank? The one we have at the moment doesn’t do much…instead it lets commercial banks do the dirty work. Market rates go up. So do banks’ funding costs. They raise mortgage rates. The RBA plays a round of golf.

And when the RBA does raise or cut rates, its goal is to curb inflation by reducing demand. Yet the type of inflation we have now is only really linked to supply. Not enough oil. Not enough rice. Not enough aluminium.

We need a central bank like we need a fly-kick to the head.

 

[nomore4s]

lol, like a fly kick to the head.
Did Chuck Norris write that article? OR maybe it was Sam76

I actually agree with a lot of what the article said but I don't think that it will ever happen because the government will not want to be seen to be giving control over to the banks.
Be a sure way to get voted out of office imo.

The problem is the majority of people just do not understand how the banking/interest rate system works.

 

[BradK]

Hi all, thanks for the responses.

Well, I guess on one level we are entering a period of great uncertainty and in some ways control does seem to be given over to the banks... at least when the RBA raised the interest rates and the banks followed suit, you knew what the rules were.

On another, more sinister level, as Macquack suggests, this whole credit crunch is a shake out of non-bank institutions to limit competition. Or a massive transfer of wealth from the middle class back to the rich is happening.

I am not ignorant of the difference between the cash and the market rate - and the pressure on banks. But I still think that there will be some gouging going on so that the banks can recoup some of their losses at the expense of ordinary Australians.

Ahhh...there are no real alternatives in politics anymore. Imagine, IMAGINE, if Rudd had the balls to stand up to the banks and just slapped their asses with more regulation.

Is ONE nationalised bank the answer to keep the f#($*kers honest?

Edward Said (in a very different context)coined the concept of 'flexible positional superiority' - that is where the powerful find themselves holding the cards in a whole series of situations without EVER giving up the relative upper hand. I find those words very relevant here.

Perhaps it is time that the words of Thomas Jefferson were shouted once again from the rooftops.

The reason I am questioning the relevance of central banks is that the ECB seems to have lost its balls as well as the RBA.

I blame 10 years of conservative governments and the fact that Howard DESPISED debate. You bring up any of these issues of an alternative and you sound like a loony leftie. When, in fact, we have just moved SO FAR RIGHT that commonsense seems nuts right now.

THAT is the real destructive legacy of Howard's rule.

Brad

 

[BradK]

This from news.com.au

A senior bank executive said yesterday that he expected a full flow-on to mortgage customers from any easing in official rates.

However, he warned there could be adverse economic consequences from banks feeling a "political imperative" to cut rates, even when their funding costs had not fallen.

"Governments could back themselves into a corner if they create political pressure to cut variable rates," he said.

"If funding costs have not declined, the rational response from a bank would be to cut back on lending, which would mean a further contractionary effect for the economy."


-------------

Sounds like a threat to me. That is why governments will not act. Sure, I understand, again, the cash/ market rate. But it just goes to show that Governments are powerless.

Alternatives? Reforms? ... or its is JUST TOO BIG?

 

[Macquack]

Is ONE nationalised bank the answer to keep the f#($*kers honest?

The Commonwealth Bank should never have been privatised. The government had a finger in the pie and had at least some influence in the market as a competitive force.

I blame 10 years of conservative governments and the fact that Howard DESPISED debate. You bring up any of these issues of an alternative and you sound like a loony leftie. When, in fact, we have just moved SO FAR RIGHT that commonsense seems nuts right now.

Spot on the money, Brad.

Good to see someone studying the macro-economic effects of government policies that affect "us all", rather than just the chorus of "what about me".

 

[ROE]

Cant beat them join them
buy their shares and have a bit of money in the bank and negotiate your own interest rate

 

[2020hindsight]

:topic
my opinion of banks? - especially the NAB? ( and I'll exempt Westpac here) - sheesh the swear jar would quickly become filled.

I recall trying to get a transferable letter of credit organised with the NAB back about 1990 when they were king of the heap, to import a massive machine and onsell it. I was a director of a small company employing 30 odd blokes and gals. All three directors had their houses on the line with NAB without realising that the NAB were total novices at international transactions (compared to Westpac anyway) - their "roving international transaction man" - who operated out of the back of a car - refused to give us the LC - their local and (particularly) their area managers likewise - on the grounds that our houses (which they had second mortgages on) didn't provide sufficient security. I explained to them that a transferable LC was nil risk to the bank. I showed him (the quite senior area manager) their own NAB literature that proved that the bank was not vulnerable as long as the LC was transferable. - in fact (to prove my point) that we could get one with Westpac without any security whatsoever.

I recall the area manager apparently not understanding anything of their own literature, and his only real contribution was to laugh at us saying .. "and have you seen Westpac shares lately? " Seriously unprofessional.

So we went "around the corner", opened a $50 account with Westpac, and their International Business Centre (a massive well run operation) gave us the (transferable) LC no question. - As I say - to prove the point.

Needless to say, I have little sympathy for NAB's current plight - although I obviously empathise with any investors around here.

on the Commonwealth Bank ?:-

https://www.aussiestockforums.com/forums/showthread.php?p=303706&highlight=commonwealth#post303706

 

[Tysonboss1]

Does any body Know what % of the funds bank's lend actually comes from the RBA,...

Banks like any business buy the funds at a wholesale rate and then lend them at a retail rate.

If the bulk of the Funds they are lending comes from sources more expensive than the RBA then they have to charge more.

In the banks defence alot of the banks are currently taking deposits on interest rates of over 8.25% and the discounted variable rate is only 8.94% thats not an overly big margin.

 

[nomore4s]

In the banks defence alot of the banks are currently taking deposits on interest rates of over 8.25% and the discounted variable rate is only 8.94% thats not an overly big margin.

A sign of how hard and how much it's costing the banks to get funds atm imo. Trying to incourage people to deposit money and they are willing to pay for it.

 

[BradK]

Reading the media, especially news.com.au, it seems Australians are being conditioned to accept that high interest rates are here to stay, we are being sold a recession, and we are being conditioned to think that the banks hands are tied as they are the victims of the so-called credit crunch.

This term 'decoupling' just keeps on popping up - seems to be the new weasel word - and it only makes me even more suspicious. After all, banks are still making record profits.

If banks secure funds on the international money markets, then why are British mortgages still around 5 or 6%? If it is so 'global' why aren't we securing funds from the same source?

Could someone please explain this to me? I do not want to remain ignorant on this point.

You can't beat em, join em? I do hope that the Australian public is not so cynical or defeated.