Big four face probe over rate-cut grab

The big four banks will be ­officially investigated for their repeated failures to pass on the full extent of central bank rate cuts to consumers.

Treasurer Josh Frydenberg says the new inquiry provides an opportunity to transparently account for their decision-making. Picture: AAP

The big four banks will be ­officially investigated for their repeated failures to pass on the full extent of central bank rate cuts to consumers under a government-launched probe into home-loan gouging.

Josh Frydenberg has directed the Australian Competition & Consumer Commission to investigate the pricing of residential mortgages as the sector continues to snub its nose at the Reserve Bank, despite an overall fall in funding costs for the banks.

While small banks and non-bank lenders would be included, the government has made it clear the blowtorch will be aimed primarily at the big four: ANZ, Nat­ional Australia Bank, Westpac and Commonwealth Bank.

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Having already faced a royal commission, the banks will be forced to come clean on pricing practices, with none of them passing on the most recent rate cut in full to borrowers but at the same time slashing interest rates for ­deposit holders.

The move by the Morrison government follows a request from the ACCC for a formal directive from Treasury to conduct an inquiry into switching home loans for consumers following a flood of complaints against the banks from consumers.

The federal government has instead empowered the ACCC to conduct an unprecedented investigation into interest rate pricing on residential mortgages.

The government would not rule out policy changes or regulation, depending on the findings of the inquiry. It has, however, ruled out any increase to the banking levy.

Since May, the RBA has cut the cash rate by a cumulative 75 basis points. The average passed on by the market has been 57 basis points in a market worth $2 trillion, of which the big four banks command an 80 per cent share.

The difference between the RBA rate cuts and those passed on by the banks is more than $500 a year for average owner-occupier home loans.

The government says the benefit to the banks totals an extra $570 million in profit this year alone.

The move signals a further escalation by the government in its war on the banks following the royal commission into mis­conduct in the financial services sector last year.

The inquiry will cover the ­period from January 1 this year, which includes the June, July and October cuts to the official cash rates. The sector has rejected repeated calls by the government and the Reserve Bank, which has argued that the economy needed the full rates to be passed on.

The Treasurer said in addition, all the major banks had already increased their lending rates by between 12 and 16 basis points in response to higher wholesale funding costs between late 2018 and early 2019.

The timing of the inquiry’s reporting date, March 30, will hand recommendations to the government ahead of the 2020 budget.

Scott Morrison first took on the banks when as treasurer in 2017, he imposed a $6.2bn banking levy on the majors.

It also follows an investigation by The Australian that showed that the big four banks had reaped an extra $14bn a year in interest ­repayments since 2011 from withholding up to a quarter of all the Reserve Bank rate cuts while reducing deposit rates.

“The failure of the banks to fully pass on the recent rate cuts to their customers when their cost of funds have come down significantly, leaves them exposed to the charge that they are putting their profits before their customers,” Mr Frydenberg said.

“This is not a good outcome for either their customers or the economy as a whole, and comes just months after the royal commission shone a bright light on misconduct in the banking sector. With this new inquiry, the government is providing the banks with an opportunity to transparently account for their decision-making and how they balance the needs of borrowers, savers, shareholders and the wider community.”

Mr Frydenberg also pointed out that when Labor was last in ­office, the RBA cut the official cash rate 14 times (from 5.25 to 2.50 per cent), with the banks passing on only five of those cuts in full.

The inquiry is designed to force full disclosure and transparency around bank pricing practices

Mr Frydenberg last week rejected calls by the ANZ to hold a summit on the prospect of a zero inflation rate environment.

The inquiry will also assess the reasons for the difference in rates paid by new and existing customers as well as the disparity between the reference interest rates published to those paid by customers.

The third tranche would once again look at consumer loan switching, which has been the subject of numerous reforms attempts by government.

A previous ACCC inquiry into mortgage pricing looked specifically at whether the banks passed on the banking levy costs to consumers. It found that it had not been passed on.

The RBA has repeatedly called on the banks to pass on their cuts to the cash rate in full, based on a reduction in the funding costs for banks and as a stimulatory measure for the economy.

“The lower cash rate should be fully passed through into standard variable mortgage rates.

“Full pass-through would also mean that the economy receives the full benefit of today’s policy decision,” the RBA governor Phil Lowe said following the central bank’s August rate cut.