By Shane Wright
Banks' reliance on depositors was being ignored in the government's inquiry into mortgage lending rates, respected businessman Don Argus has complained as Westpac warns banks could be forced into lifting interest rates to protect their profits.
Mr Argus, former chief executive at NAB and a former chairman of BHP Billiton, said in the rush to help home buyers the interests of depositors who relied on the interest on their savings were being disregarded.
The government has charged the Australian Competition and Consumer Commission to examine how banks set mortgage interest rates and why the big four have failed to pass on the 0.75 percentage point reduction in the official cash rate by the Reserve Bank since June.
The inquiry, which has to report back by September next year, does not touch on changes in deposit interest rates.
Mr Argus said there appeared to be a lack of understanding among politicians and policy makers about how a bank balance sheet works, as institutions attempt to balance the interest rates they charge those who borrow against what they pay to those with savings.
"There's two sides to the balance sheet and they're just looking at one. No one is looking at the depositors," he told The Sydney Morning Herald and The Age.
Former NAB chief executive officer Don Argus says the focus on banks has ignored what they need to do to protect deposit holders.Credit: AAP
"Everything has to be funded across the bank's balance sheet. No one seems to understand the banks' balance sheets and how they work. You have to look at both sides."
Mr Argus said attacks on the banks, particularly from the left, had grown in recent years but the value of banks to the broader economy was being forgotten.
"The banks have been a key part of the fact that for the last 28 years we've had continuous economic growth in this country," he said.
Westpac chief executive Brian Hartzer said while his bank welcomed the inquiry, it had to balance the needs of borrowers with depositors and shareholders.
Westpac chief executive Brian Hartzer has warned that a hit to the bank's credit rating could force up interest rates.Credit: Joel Carrett
He said banks had to make a "reasonable" level of return to support banking stability and their debt ratings, warning anything that put that at risk could force it into lifting interest rates.
"Westpac must also retain its AA rating. This rating allows the bank to import funding at more reasonable cost from international investors," he said.
"To lose it would increase the cost of our wholesale funding which would inevitably lead to higher interest rates for our borrowers."
Treasurer Josh Frydenberg said the government wanted the inquiry to help customers get a better deal from their lending institution, arguing it was about finding out information.
Josh Frydenberg said the government wanted the banking inquiry to help customers get a better deal from their lending institution.Credit: Alex Ellinghausen
"What we need to know in better detail is the difference between the advertised price and the actual price paid. And what we need to do is to understand if there are barriers for customers to switch banks in order to get a better deal," he said.
But the inquiry will also look at the difference between discounts on mortgage rates for new clients continued to higher rates for loyal customers.
UBS analyst Jonathan Mott said people could end up paying higher interest rates if the government forced banks to narrow the gap between rates for new and existing customers.
"Banks could offset this by reducing the discounts offered to new customers, reduce deposit rates or reprice other products," he said.
In its most recent financial stability review, released in early October, the RBA noted bank interest margins were falling and were likely to continue dropping partly because of very low deposit rates.
Figures compiled by Canstar show that since the start of the year the major banks have protected their small scale depositors.
While the average reduction in low-interest deposit accounts has been 0.49 percentage points, the drop on mortgage rates has been around 0.57 percentage points.
On term deposits, however, the average cut has been closer to a full percentage point. The average rate on a $25,000, three-year term deposit has fallen to 1.53 per cent from 2.69 per cent.
The ACCC is already working with Treasury, the Reserve Bank and the Australian Prudential Regulation Authority on an online tool that would provide information on the average mortgage rates paid on new loans.
Banks have been supplying this information to regulators for some time so the online portal can be made operational next year.
That followed a recommendation from last year's Productivity Commission study into the financial sector that found "consumer inertia" meant customers failed to shop around for better interest rates among the nation's banks.