Reserve Bank delivers big four banks unparalleled golden period

The RBA has delivered the big banks an unparalleled golden period, the likes of which we have never seen before, and which we should hope to never see again.

The big four banks are cashing in as the Reserve Bank continues to increase interest rates.

The first 18 months of the Albanese Labor Government has been an utterly unparalleled golden period for Australia’s four big banks, the like of which we – and they – have never seen before, and which we should most certainly hope never to see again.

The biggest role, in quite literally pouring billions of dollars into their coffers – and onto

shareholders in dividends – was played by the Reserve Bank.

It did two things.

First was raising interest rates; starting almost simultaneously in May 2022, albeit entirely coincidentally, with the election of the Albanese government, from the RBA’s infamous ‘free money’ Covid-panic driven 0.1 per cent. Effectively, a zero interest rate.

As we all know, the banks raise their lending rates faster and further than they raise their deposit rates.

This has played out in the 14-point increase in NAB’s net interest margin (NIM) for the 2022-23 year and the 12-point NIM increase reported by Westpac.

That mightn’t sound much, but with $700bn-plus of loans each has out to borrowers, it translates to nearly $1bn of essentially free extra income for each bank.

True, before tax.

The second and even bigger bonus came from the real, actual free money that the RBA had given the banks in the, quite literally, fear and loathing days of 2020 and 2021.

As at June 2021, the banks had $188bn lent by the RBA to them for up to three years, on which they paid that all-but zero 0.1 per cent fixed rate.

This really played out big time through 2022-23 and those surging lending rates – with that money being on-lent to home loan borrowers at interest rates going to 6 and 7 per cent.

Here’s a rough calculation.

Over 2022-23 the banks had an average $160bn borrowed from the RBA at that 0.1 per cent. That meant just $160m – a totally nominal sum – of interest they had to pay.

If they had it lent out at an average rate of 5 per cent over the year, thanks to the RBA’s rising rates, they would have got $8bn in interest income from borrowers.

You’ve got to say that’s a pretty tasty deal. $8bn in, just $160m out.

Although that mother of all free lunches is now disappearing. As at end-September, the banks had $112bn left borrowed at that 0.1 per cent; and it will finally be fully repaid to the RBA by June.

When the banks were themselves handing out the closest thing to free money that borrowers will ever see in our lifetime – getting home loans at starting interest rates of just 2 per cent – they locked in huge numbers of borrowers.

Now those borrowers have seen their repayments surge with the rising rates – all of course, flowing into bank coffers.

Normally the banks would be paying a price with surging borrower defaults.

That has happened – yet – because of two other factors.

This is the huge surge in immigration-driven population – boosting both the economy and property prices – coming on top of the economic surge out of Covid.

It’s been pure gold for banks. And bankers.

Originally published as Reserve Bank delivers big four banks unparalleled golden period