Banking: ANZ can't do right for doing Wong

Australian Treasury Minister Penny Wong said yesterday that the decision by ANZ to scrap exit fees on domestic mortgages proved the strength of her government's legislation. But rather than credit ANZ bank for being the first to abolish the fees, and to adopt a raft of cost-reductions for those switching loans, she lambasted the bank for the rise in interest rates that the bank applied at the same time.

The bank increased loan rates by 0.39%. A week ago, the Australian Reserve Bank increase rates by 0.0.25%.

ASIC's announcement that banks would be sued (not prosecuted) if they took excessive profits from home loan customers and specifically took aim at exit fees - the penalties applied for early settlement. In particular, ASIC said, banks would not be able to take charges at both ends of a loan i.e. an arrangement or loan fee plus an exit fee.

Australians have very high home loans: the average is said to be AUD300,000. The increase in rates will add AUD77 to a standard-rate loan of that size.

The bank had balanced the package carefully: in addition to abolishing exit fees, it also announced a 0.44 discount on its three-year home-loan agreements (but only until the end of 2010) and offered AUD1,600 to subsidise "switching costs."

Wong was not the only one on the attack: in Seoul, Australian Prime Minister Julia Gillard continued her trend of taking pot-shots at banks. She described ANZ's move as "arrogant." But her view is coloured by a policy of trying to inject capital into the economy and the move by both ANZ and Commonwealth Bank discourages borrowing and encourages saving.

As the G20 meets in Seoul, one of the issues facing the governments represented is how to unlock cash in savings. Many, such as the USA, are doing that with deflationary policies on the one hand and tax increases on the other. But, ironically, they are seeing that their policies are causing inflation - which central banks are struggling to contain with the only weapon available under monetarist economic policies - interest rates.

Australian interest rates are, in global terms, high.

Australian banks are in an unusual position: they are required to source at least 30% of their capital from outside the country. As a result, they are caught in a squeeze: the Australian dollar is riding high against most foreign currencies: for the first time in many years, it has not only reached parity with the US dollar but surpassed it.

That is increasing the cost of borrowing for the banks. Memories of just over two years remind anyone who cares to think about it that it was the lack of liquidity in inter-bank lending that led to the near-collapse of the global banking network, for the first time demonstrating the inter-connectedness of the banking sector.

ANZ Australia CEO Philip Chronican recognises that the bank has to protect itself, its shareholders and depositors - and, ultimately, the taxpayer under guarantees and said "intense competition for deposits and high wholesale funding costs."

Some fear that a rise in deposit rates at large institutions will have a negative impact on smaller financial institutions who, traditionally, operate on lower margins between depositors and borrowers, increasing the rates paid to the former and reducing the rates paid by the latter. If the large banks hoover up deposits by offering better rates, then liquidity in the smaller banks will reduce and, because they may be seen as higher risk, their cost of borrowing will increase still further.

This leads to fears of failures in the smaller banks and secondary banking sector.

The bitterness is about who controls the economy: governments, not just the Australian government, are using the experience of the global financial crisis to move towards micromanagement of banks, seeking direct input into their terms and conditions and rates. Banks have to satisfy consumers on the one hand and shareholders on the other. It's a difficult balancing act and one which ANZ sought to manage with a balanced package of home-loan reforms.

That the government has focussed on only one aspect of that balance is disingenuous.

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Nigel Morris-Cotterill is Head, The Anti Money Laundering Network, ultimate holding company of BankingInsuranceSecurities.Com

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ANZ statement on exit fees and rate changes: http://anz.com.au/resources/9/7/975edd0044a3ef8ab168fffb15aad448/MediaRelease-20101111.pdf