The Australian banks are claiming the need for more special treatment to stop terrible things happening, as they claim to see them.
There they were on the front page of yesterday’s Australian Financial Review claiming all sorts of dire things might happen to the economy if they weren’t give some help in meeting the cost of raising more local deposits: say a tax break.
"Bank chiefs warn on funding gap" barked the headline.
With NAB chief, Cameron Clyne in the lead, the story contained all the right buzzwords of the financial crash and credit crunch such as ‘Deposit base too low" "threat to recovery" ‘Overreliance on offshore money’.
The banks warned they might have to rein in lending and kill the recovery: warnings that ignore what’s happening now in the economy.
The banks are only increasing lending now for housing. All banking lending for business is falling as they refuse to lend to companies large and small and force many listed companies to raise funds (over $A40 billion) in the stockmarket.
The economy is in recession, official figures or not. The import figures for May confirmed that with a 9% fall and a 7.5% fall in credit card transactions in April also tells us that consumers aren’t spending up big.
(That was the first fall in credit card use in 14 years, which is bad news for the banks).
What the story is a subtle warm up for a renewed demand by the banks (It will be run through the Australian Bankers Association, with help from the various CEO’s and no doubt some ‘independent’ research) that they need tax deductibility for the interest they pay on deposits.
The story is that way deposits can be built up more quickly and our reliance on offshore funding reduced.
That will enable the banks to end the expensive competition they are now engaged in trying to lure and hold deposits from ordinary Australians and companies.
They are being forced to offer 4%-5% a year (usually for the first few months, but they clever depositor can get it for a year for term deposits.
The high rates are being offered to attract, and hold money and that is starting to hurt.
ING Bank and Rabo are proving to be solid competitors with their online offers and attracting money whenever any of the big four drop rates.
The big four control over 92% of all home lending in Australia, and have been allowed to get even more concentrated by the CBA buying BankWest and control of Aussie Home Loans; and Westpac to takeover the good bits of RAMS and St George.
But they continue to moan about the cost of attracting and holding deposits. It’s all the fault of those greedy depositors who want high rates.
Bank analysts in the broking houses and in ratings agencies have suddenly awoken to the issue of too few deposits compared to overseas borrowings and are now carrying figures showing which bank has the smallest holding of deposits.
There’s a suggestion that its weak and its future could be threatened by a sudden rise in the cost of offshore funding.
It’s an issue that has been around for years, but one analysts and the banks have ignored.
When the credit crunch broke, the banks found themselves flooded by deposits as investors and ordinary Australians pulled money out of shares, property and other investments and stuck it in the big four banks.
Now the banks are finding they have to offer more to keep that safe haven money, or they have to risk the ire of bank analysts (who are in it for a fee anyway) and fund managers in going offshore and raising money, even with a Government guarantee (Gee these bankers don’t want much do they; deposit guarantees, offshore borrowings guaranteed for three years).
There are only four of them and they are a protected species and are exploiting it to the hilt, regardless of the national good.
The key paragraph in the AFR story was buried towards the end:
"Mr Clyne agreed creating a large fixed interest market could alleviate the pressure on banks. Another option would be to change the tax treatment of bank deposits to bring them into line with superannuation."
That would allow the banks to reduce the amount of money they are paying out in interest to depositors, at the expense of depositors’ income levels.
The banks would then use the tax deduction to increase their marketing spend (all effectively subsidised by taxpayers), while fattening their interest margins.
They have already tried to make money out of superannuation by buying fund managers (MLC for the NAB for example or Colonial for the CBA).
But those deals haven’t been stunning successes and the crash in the markets in the past 18 months has hurt.
Superannuation is also a long term investment for people: usually it’s all their working lives.
Whatever benefits should accrue to the policy holder. For business it’s a deduction, just as interest is and wages.
Deposits in banks are something very different. They are short term more volatile, despite what bank analysts might claim.
Northern Rock bank in the UK collapsed and was taken over by the UK Government. It was not only hurt by a cut off of its access to short term wholesale funding, but it was sunk by a run in person and online by depositors grabbing their money.
In fact the UK has had several runs since then and the US had runs the failed IndyMac bank and on the huge Washington Mutual before it collapsed.
Bank deposits from ordinary people are no more ‘sticky’ than wholesale funds when there’s a loss of confidence, but there is no recognition of t
