By Gareth Vaughan
The Commerce Commission should be looking closely at banks' overall interest margins in its market study into personal banking services, says David Cunningham.
Cunningham is CEO of Squirrel Group, a mortgage broker that also offers lending and investing products and services, and a former CEO of The Co-operative Bank and manager at Westpac New Zealand.
In the latest episode of interest.co.nz's Of Interest podcast, Cunningham talks in detail about how interest rates are set for borrowers and savers, and the key area the Commerce Commission should look as it assesses competition for deposits and home loans.
Banks ultimately manage to the overall interest margin across both sides of their balance sheet covering their lending via the likes of home loans, and borrowing via the likes of deposits, Cunningham notes.
"Banks use something called transfer pricing, where they use the wholesale [interest] rate as a benchmark and then they assess the margin above that for loans and below that for deposits. But of course those margins on loans and deposits move in and out through the interest rate cycle. They're wider on lending at the lows, narrower in lending at the highs," says Cunningham.
"I think what the Commerce Commission should be looking at is that overall margin."
He says it's "disingenuous" for a banker to say margins are low on home loans at the moment without looking at the other side of the balance sheet because margins could be high on deposits.
"Unfortunately right now we're actually having that behaviour where we've got some banks setting rates with only reference, it would seem to me, to the wholesale [interest] rates."
"The key point is margins move in and out but you've got to look at the total. And that's what I think the Commerce Commission will be looking at, that quantum of the whole pricing decision. Not just a pricing decision on an individual product in isolation," says Cunningham.
The record low 0.25% Official Cash Rate (OCR) through most of 2020-2021 followed by a rapid increase to 5.50%, has allowed banks to expand interest margins by about 20%, Cunningham says.
"It's a lift in the price of the net margin you're charging on your product of 20%, which actually most New Zealand businesses would love if they could do that as an industry. And that's an oligopoly in action, and that's what the Commerce Commission will be exploring."
In the podcast Cunningham also talks about why he doesn't believe banks' net interest margins are justifiable at the moment, what to be wary of in a high interest rate environment including break fees, the role of bank capital in driving decisions on sectors banks like lending to, secured and unsecured lending, and how interest rates are set on everything from the OCR, to the bank bill benchmark rate, swap rates, home loans, term deposits, personal loans, car loans, credit cards, business lending, rural lending and bonds, and his own role in making fixed-term mortgages more popular than floating rates.
There's more from David Cunningham on interest rates and bank margins in this article here.
*You can find all episodes of the Of Interest podcast here.
11 Comments
On our planet earth – as opposed to the very different planet that economists seem to be on – all markets are rationed. In rationed markets a simple rule applies: the short side principle. It says that whichever quantity of demand or supply is smaller (the ‘short side’) will be transacted (it is the only quantity that can be transacted). Meanwhile, the rest will remain unserved, and thus the short side wields power: the power to pick and choose with whom to do business. Examples abound. For instance, when applying for a job, there tend to be more applicants than jobs, resulting in a selection procedure that may involve a number of activities and demands that can only be described as being of a non-market nature (think about how Hollywood actresses are selected), but does not usually include the question: what is the lowest wage you are prepared to work for?
Thus the theoretical dream world of “market equilibrium” allows economists to avoid talking about the reality of pervasive rationing, and with it, power being exerted by the short side in every market. Thus the entire power dimension in our economic reality – how the short side, such as the producer hiring starlets for Hollywood films, can exploit his power of being able to pick and choose with whom to do business, by extracting ‘non-market benefits’ of all kinds. The pretense of ‘equilibrium’ not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the politically more convenient alleged role of ‘prices’, such as the price of money, the interest rate. The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.
However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.
Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.
The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.
It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.
Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen. Link
Maybe they do... Or were we bankrupt already of wisdom, sovereignty, intelligence, values... Or simply ignorant and enslaved... Which allowed the "money" makers to rule the world.
"Permit me to issue and control the money of a nation, and I care not who makes its laws!"
Banks could barely lend any faster during 2020-2022 when things were on the up and up and they made bumper profit from the FLP for no work at all. Now the risk profile of the mortgages issued in this time is changing with decreasing prices and they are still making high margins and there’s questions around if the TD rates are what they should be. A lot of actions from the comcom now but perhaps the real question is, why not sooner?
Banks were indeed lending like bandits when rates were low and sensible prudential controls had been (stupidly) dropped by the RBNZ.
But how many people actually got to take advantage if fixes like 5-years @ just 2.99%.
Actually far, far less than you'd imagine. Why? The below from my comment on another article:
I'm guessing you are unaware of the obfuscation and outright nonsense the banks used to reject just about all attempts by people to re-fix - or break and re-fix - or consolidate debt - at these low rates?
Or that they arm-twisted people into far shorter terms? Or that they pretended rates had even further to fall? Or they simply stonewalled the request until while they ratcheted up the long end quite quickly!
Just one example: They applied "test rates" at the beginning of a 5-year re-fix at 2.99% rather than at the end of the five years while ignoring the fact that the vast majority of people applying to re-fix would actually be paying less than they were at their current fixed rate!
That's not applying "commercial judgement" - the "get out of jail card" they use for any suspect behavior - it's usury (the action or practice of lending money at unreasonably high rates of interest). Usury - pure and simple.
The word went out to bank staff when rates got that low. Doubt me? Here's ASB's chief executive Vittoria Shortt:
"We've been preparing for higher interest rates ever since we had record low interest rates."
Source: https://www.goodreturns.co.nz/article/976522089/times-are-tough-for-bor…
And people wonder why banks in NZ are so profitable. Sheesh. The answer is friggin' obvious. We have an extraordinarily weak regulatory system that allows banks to engage in this sort of practice.
Interest.co.nz would do well to follow this. Lots and lots great column inches.
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