Margins

April 4th, 2017

We’re all used to the fuss that takes place when the Reserve Bank cuts interest rates and banks don’t follow suit. On the other hand, when rates go up, the increase is almost always passed on rapidly and in full. But does this matter in the long run, or does competition sort things out. In this context, my wife Nancy pointed me to this interesting graph from the Housing Industry Association.

It seems pretty clear here that bank margins have increased steadily over the past ten years. I haven’t checked the data, but at least for mortgage rates, the current numbers look right to me.

  1. Newtownian
    April 4th, 2017 at 19:00 | #1

    This could be interpretted as the banks getting greedier. But there is a possible alternative. As I understand it in 2008 so much value had been wiped off the market there wasnt much liquid cash especially from overseas though we still had a bubbly housing market. Also people didnt trust the banks so they needed to offer relatively high returns.

    Now people are much more fearful and have kept their money (e.g. super) in more liquid cash deposits despite the low interest rates. A belief here is that shares are also inflated which indeed they are compared with 30 years ago – when they were based on assets (identified as lazy by Alan Bond and Gordon Gecko for fun and profit) – versus now when it is based on speculative mark to market.

    And there is this continually accumulating pot of superannuation in Oz – where is it to go when there is a stagnant global economy? Again this helps the banks and makes the RBA cash rate less influential.

    A possible related issue to this is the housing bubble – nice couple of plots of this here http://www.nakedcapitalism.com/2017/04/ilargi-economies-run-housing-bubbles.html
    I know the use of nominal house prices (no inflation accounted for) is a bit dodgy. Still it does feel still like we are still in a bubble especially when you compare Oz to the US as Steve Keen has long loved to do.

    At least that is my personal feeling. Feel free to correct.

  2. John Hawkins
    April 4th, 2017 at 22:33 | #2

    Hi John,

    A significant and varying proportion of banks’ funding is not raised at rates related to the cash rate. The Reserve Bank’s measure of margins is given at http://www.rba.gov.au/chart-pack/images/banking-indicators/major-banks-net-interest-margin-small.gif

    Essentially it looks like there was some narrowing of margins with deregulation/move to low inflation but they have been little changed over the past decade (other than a temporary widening after the GFC).

    cheers
    John

  3. Jordan from Croatia
    April 5th, 2017 at 06:29 | #3

    “We’re all used to the fuss that takes place when the Reserve Bank cuts interest rates and banks don’t follow suit.”

    Is that why i do not notice any fuss about margin? Is that why they still do not know why Secular Stagnation is there?
    I do not ever read about such complaints, it seems to me that i am the only one talking about that it is the reason for impotent monetary policy and why negative rates are not having any effect on economy. Yes i heard about suggestions to set target policy at 4% inflation to have a room to bite, but is that talk only happen between economists behind closed doors, because i rarely hear about it.

  4. Smith
    April 5th, 2017 at 09:25 | #4

    For a while, banks moved housing loan rates one for one with movements with the cash rate. They don’t anymore. But before they did, they put loan rates up the next day after the cash rate went up, and loan rates down three months or so after the cash rate went down. I heard a bank spokesman on the radio explain (away) the latter by saying that banks had all this borrowing they’d done at the old higher cash rate so everyone had to wait while this washed through the system. Of course the same argument should have applied symmetrically when cash rates went up, but the interviewer didn’t have the wit to ask. Banks only moved to change rates both ways the same day as the ash rate after Peter Costello lent on them.

  5. Simon Fowler
    April 5th, 2017 at 09:39 | #5

    I’m a little confused as to what margins mean in the context of modern banking, given that the idea of loanable funds is bunk (as demonstrated by a number of Bank of England papers that have come out in the last few years, the one I found first being here).

    If deposits (created as a result of new financing – the positive side of the asset/liability ledger) come first, and reserves only have relevance when those deposits are transferred out of the originating bank, why are banks charging four and five percent on top of that in even the most competitive part of the retail market (home mortgages)? I’ve seen mention of the cost of other sources of funding (including international sources) as the driving force behind the increasing gap between the RBA rate and the retail rates, but what are those sources of funding /for/ if the RBA will provide reserves at a much lower cost? Are they only relevant to the investment banking side of the operation, or the bank’s internal capital management (presumably that’s just investment banking with their own money rather than other people’s)?

    Is it just that the banks are charging interest rates that have nothing at all to do with their real costs, or are transferring costs from unrelated parts of their business over to the retail lending part? And if so, why aren’t small lending institutions coming along and charging much lower rates by simply eschewing the riskier and costlier aspects?

  6. Ikonoclast
    April 5th, 2017 at 12:40 | #6

    Just another way that the capitalists, financiers and rentiers (meaning rich people who acquire masses of income not earned by their own direct personal effort or earned by minimal personal effort relative to the largess of the income) are ripping of workers and ordinary people.

    If we had a government not beholden to their neoliberal, corporate masters this simply would not be permitted to happen. There are various ways to regulate these matters without killing any goose that purportedly lays golden eggs. Currently, these geese lay golden eggs only for the already rich. The lay maybe some silver and copper eggs for the middle class and then they just lay a whole lot of manure eggs for the lower 50% of people at least.

    The neoliberal economy is unjust, socio-economically unsustainable and environmentally unsustainable. Change it or we will lose everything. We lose any chance of having a viable economy or a viable environment into the future. This current neoliberal set-up looks to me to have only about 10 to 20 years left in it, at the most. Change it or suffer a global economic and environmental catastrophe. That is the bottom line.

  7. Ikonoclast
    April 5th, 2017 at 12:47 | #7

    Addendum to above. It looks though that I am going to lose a bet with J.Q. If J.Q. recalls, I laid a bet with him that World Gross Income (I accepted his definition) at end of 2020 would be lower than at end of 2010 (when the numbers are in). The best was for AUS $100 inflation adjusted from end of 2010 would be lower than at end of 2020. I am still prepared to pay if, as looks likely now, I lose the bet. I am sure J.Q. would take payment and give it to a charity of his selection. In the unlikely event I win, I would simply ask J.Q. to make the same donation out of his funds.

    Now, if I had nominated 2030, I might have stood a better chance but that’s water under the bridge.

  8. Ikonoclast
    April 5th, 2017 at 12:53 | #8

    2nd addendum. An inflation adjuster site tells me AU$100 in the year 2010 is worth AU$113.84 in 2017. Phew, my payout for the lost bet at end 2020 might not be as great as i feared. I will round it up to the nearest $10. Thus if there was no inflation between now and end 2020 (unlikely), I would pay AU$120.00

  9. Peter T
    April 5th, 2017 at 14:06 | #9

    The obvious explanation is that as profits have shifted from other sectors to finance, banking (along with real estate etc) is supporting a proportionately larger number of upper class incomes. Hence its margins have to increase.

  10. Greg McKenzie
    April 6th, 2017 at 08:29 | #10

    The latest ABS charts on the relationship between bank mortgage rates and the official cash rate seem to also highlight some long term trend changes. The margin, or gap, between the two seems to have lost its past trend relativities. The RBA seems unconcerned by these trend changes. They are either, sitting on data we simply are not seeing, or, sitting on their hands and hoping for another lucky break. Blaming asset inflation,at a time of low goods inflation, seems more of a smokescreen than a valid reason for neutral monetary policy settings to extend throughout 2017.

  11. Lead Belly
    April 7th, 2017 at 14:33 | #11

    Willing to be put right: why isn’t this simply a growing risk premium to reflect that the banks are holding an ever riskier bundle of loans, particularly in the price bubbling housing sector?

  12. Simon Fowler
    April 8th, 2017 at 10:43 | #12

    Lead Belly :
    Willing to be put right: why isn’t this simply a growing risk premium to reflect that the banks are holding an ever riskier bundle of loans, particularly in the price bubbling housing sector?

    Has there been a significant increase in the number of defaults recently? The last info I’ve seen says that default rates are still low, which would suggest that if this is their reasoning it’s more of an excuse than an actual requirement.

  13. Lead Belly
    April 8th, 2017 at 11:43 | #13

    @Simon Fowler

    Doesn’t have to be [I]actual[/I] defaults/bad debts. Markets are driven by expectations.

  14. Simon Fowler
    April 8th, 2017 at 13:25 | #14

    @Lead Belly
    If they were genuinely worried about those potential bad debts they’d have changed their lending policies. Instead they’re still pushing debt like it’s going out of style, and still making profits hand over fist.

    Actions speak louder than words, I think, and in this case they’re saying pretty clearly that the banks don’t expect any increasing problems with bad debts.

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