“How the banks steal from you right under your nose… Legally”
Glen from the RBA is trying his best, cutting rates and trying to light a spark under consumer spending, the banks are taking the opportunity to line their pockets quite nicely, thank you very much. It's a cosy cartel that's putting Aussie investors out of pocket and putting a drag on the whole economy… Burn the banks I say.
Is anyone else getting tired of the banks crying poor? As Aussie investors etched out modest returns where they could over the past few years, the banks continued to post record profits… I've got no problem with that, business is business… But they continue to tell us that conditions are “too tough” to pass on RBA rate cuts in full.
Come on, who do they think they are kidding?
I know the banks can make for an easy target. And I'd be the last person to complain about honest businesses doing all they can to turn a profit. But it leaves a bad taste in my mouth to see them taking us for a ride….and blatantly stealing from me and you.
They secured a number of favourable concessions for themselves in the fall-out of the GFC, knowing that the economy is hamstrung with its financial sector. But now that things have turned in their favour again, that sense of civic duty seems to have gone out the window.
How this legal cartel steals billions from investor…
The RBA cut official interest rates by 25 basis points in December. The majors (CBA, ANZ, NAB and Westpac) passed on just 20 basis points, some of them dragging their heels about it. Since the current rate-cutting cycle began in November 2011, the RBA has cut rates by 175 basis points. The majors have, on average, knocked just 136 basis points of the Standard Variable Rate, pocketing 39 basis points for themselves.
In dollar terms, with an average home loan of around $400,000, a 0.39% difference is roughly about $1,560 per annum.
…oh, and the typical life of the loan is around 25 years… so that number could be $39,000.
Personally, I'd rather that sum be in my pocket that the evil cartel's.
Sure, there are many variables that would effect the actual amount, principle and interest payments, the diminishing balance, blah blah blah…
But stealing is stealing… whether it's $10 or $1,000, the amount doesn't matter… it's a bloody crime and no one is doing anything about it.
What's their excuse this time?
The banks are still pointing the finger at the cost of funds. For most of last year it was the cost of wholesale funding on international markets. As banks, and even governments the world over started to look shaky, as Greek civilisation teetered at the brink of collapse, capital on global markets started to dry up. The major banks in particular depended heavily on off-shore markets, and the cost of funds was going through the roof.
In response, the banks tried to insulate themselves from global markets by coming home to faithful depositor funding – the money Aussies have got stashed in the bank for a rainy day. But then wouldn't you know it, all that competition for deposits forced them into offering savers a better rate, which in term ratcheted up the cost of capital again.
On the face of it, the cost of depositor capital is the principle reason why the banks held on to some of that December rate cut. “Our overall cost of funds remains elevated due to the competitive pressures for customer deposits,” Westpac spokesman Paul Marriage said. “This is unlikely to change,” he warned.
Basically, “Get stuffed, we're keeping the money. Get used to it.”
Something Doesn't Add Up – Wholesale Funding Makes a Comeback
But hang on a sec. Something's a bit off here. If it was the international capital market that forced the banks back into the arms of depositors, hasn't the international situation improved?
International capital markets are a lot calmer now than they were a year ago, and the cost of capital is falling. It's saving the banks a fortune.
For example, in January of last year, the CBA borrowed $3.5 bn for 5 years at a rate 175 basis points above the bank swap rate. This year, in a similar deal the CBA ran away with a rate just 50 basis points above the swap rate.
125 basis points on a loan like that is not to be sneezed at.
Should I need to do the Math again…not really, just triple the figures I mentioned above…ouch now that really hurts…
But, it gets worse…the average investor would have millions in borrowed money…
Triple again and then some… I did my own calculation based on my borrowings.
OMG… I need a scotch (bottle) and a lie down.
The Australian also reported that the CBA has plans to retire early about $5bn worth of government guaranteed funding (itself a massive windfall for the banks) and go back to the market and refinance it all at lower cost.
So this story about the cost of capital still hurting the banks starts to ring a little hollow. In fact ING passed on the last two rate cuts in full. According to their CFO Glenn Baker, they could do this because, “the cost of new wholesale money dropped significantly over the year and the cost… continues to decline.”
Good on you, Glen…
More Than Just Money At Stake
So enough with the crying poor. Banks are currently enjoying the best conditions since the onset of the GFC. It's time they let Australian businesses and investors have their time in the sun too.
In fact, I agree with Australian Chamber of Commerce and Industry CEO, Peter Anderson. He went on the attack last week, saying, “in the current circumstances, with global funding costs easing, the banking industry should look to reduce rates outside of the normal cycle.”
….in laymen terms, what Peter is saying… “Hey, we know you are pinching from the cookie jar, stop doing and give the money back you #%$@…”
He's right. There's more at stake here than just the banks bottom line. It goes to the heart of small business funding, new home-ownership and the ability of investors to secure adequate rewards for the risks they take.
Some hard-liners would say that we've got no place telling banks how to run their business. But you can't have it both ways. You can't leverage off the central role of finance in the economy to secure concessions for yourself – profitable concessions such as government guaranteed funding, or a cave-in on the use of covered bonds for example – while defending your right to be an unfettered participant in the market.
Australians deserve and expect better. It's time for the banks to start doing their bit.
So what can you do about it?
Glad you asked.
Play them off against each other…
One thing is for sure with cartel or mafia style organisations… Loyalty to each other is not their strong suit. They want your business and they want it badly.
Whilst times ARE good, they know that it's been, a lot better.
Mortgage and borrowing numbers are significantly down since the heady days of 2004 and they know it.
Get a rate from one bank and then walk out the door and into the next bank and ask them to beat it… you will be surprised how accommodating they will be…
If you already have a few loans currently, shop them around as well.
I did this exact thing recently with my bank. I went to an opposing bank, told them how much I wanted to borrow, they gave me a crazy rate. I went back to my bank and not only did they match it, but they beat it by a couple of points.
The rate that I eventually got them down to was 5.5% – and that's for an investment loan.
You probably want to know which bank, right?
ANZ…but that's not the point…
You may or may not get the same rate as me…but l will guaranteed you, if you ask you will save/make money…thats for sure.
You've got nothing to lose….more money to gain.
Go for it…