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Issue #1480      10 November 2010

Bingeing banks cry poor

The ink was hardly dry on the annual returns of the Big Four banks when the Reserve Bank of Australia (RBA) handed down yet another crippling interest rate rise – crippling for ordinary working people, small business and small farmers but not for the banks. With an annual combined pre-tax profit of around $30 billion ($21.7 billion after tax), ANZ, Commonwealth Bank, NAB and Westpac were laughing. Their profit results are a direct result of unregulated monopoly price gouging and heightened exploitation of their workforces. Now they stand to make even larger profits.

The Treasurer Wayne Swan pleaded with the banks not to raise their rates by more than the RBA increase. Opposition Shadow Treasurer Joe Hockey had already politically out-manoeuvred the Treasurer by launching a verbal attack on the banks for their lack of competition before the profit results and RBA decision had been released (See Editorial, Guardian 03-11-2010).

Hockey put forward a nine-point plan that would do little to change the situation. He appears to realise that the banks’ actions could harm other sectors of the economy. Swan will release details of his policy next month. The banks have nothing to fear from either Liberal or Labor.

The RBA increased the official cash rate by 25 base points – adding 0.25 percent to the rate. This is the sixth interest rate increase since October 2009, over which time the official rate has risen from three percent to 4.75 percent. Each increase hurts homebuyers and tenants (as rent increases always follow on) as well as those with personal loans and business loans.

“Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening. While there has been a degree of caution in private spending behaviour thus far, the rise in the terms of trade, which is now boosting national income very substantially, is likely to lead to stronger private spending over the next couple of years, especially in business investment,” said Glenn Stevens, Reserve Bank Governor, in his statement on the RBA’s decision to increase the official cash rate.

It is a big blow to the retail sector in the run-up to the important pre-Christmas period. People are exercising “a degree of caution” simply because they just don’t have the money to spend and fear the consequences of future interest rate rises. Their incomes have not kept up with previous mortgage increases and rising prices, in particular electricity, alcohol and tobacco. Rising business investment on its own will not provide increased demand; people need wage rises, full-time jobs and higher pensions.

RBA got it wrong

The RBA has got it wrong. Its decision will have a contractionary effect on the economy at a time when it is hardly out of recession. It is the old “fight inflation first” policy: “the risk of inflation rising again over the medium term remains,” said Stevens.

The RBA is relying heavily on resource exports to China and other parts of Asia to sustain economic recovery. Apart from the assistance it gives the financial sector, the RBA ignores the impact of its decision on the rest of the economy which is still relatively depressed. The Australian government, in full neo-liberal mode, is planning a very tight budget with its own austerity measures, as it blindly pursues a return to budget surpluses. This will only reduce demand for goods and services as will the higher interest rates.

Meanwhile the banks continue to act with impunity having nothing to fear from all the hot-air in Canberra. Their PR consultants are already at work devising means of restoring their public image.

Interest rate induced poverty

An increase from three percent to 4.75 percent may not sound a great deal but as a percentage increase it is a whopping 58 percent in interest repayments. Workers’ wages increased nothing like 58 percent over the past 13 months! Needless to say the CEOs at the banks did not hold back with increases in their packages in the hundreds of percents and millions of dollars. Every rate rise adds to the list of working poor and homeless.

The Big Four consolidated their monopoly position during the financial crisis with the help of the government’s deposit and other guarantee systems. The relatively smaller banks such as Members Equity (set up by industry superannuation funds), the building societies and credit unions hardly pose a threat to them. The media almost talk as though they do not exist, yet some do offer a better deal than the Big Four.

The Big Four deny lack of competition or collusion. They just happen to follow each other making similar decisions. This time Commonwealth Bank went first, upping its mortgage rates by more than the RBA increase. The others will no doubt follow, but in the current political climate may take a little longer than usual. (Westpac went first last time.) The Commonwealth stands to make an additional half billion in profits from its decision to add 0.47 percent to its standard variable mortgage – almost double the RBA’s 0.25 percent.

Fees, fees and more fees

The average Australian is paying around $1,000 in bank fees every year. On every front bank customers face exorbitant fees, most of which involve a simple, automatic electronic recording or notification - certainly no justification for penalties of $30 or more.

Take, for example, a so-called “45-day interest free” credit card for which the card holder has already paid a fee. If the amount owing is paid just one day late then interest is charged for the full month - including the 45 “interest free days”. The penalty for being one day late - thinly disguised as an interest payment - could be anything from a few dollars to hundreds of dollars, depending on how much is owing. Then there are late payment fees, over-the-counter-fees, statement fees, ATM fees, etc, etc.

Trying to find cheaper deals is a mine-field. Special lower interest rate offers for credit cards last six months. Card fees, late payment penalties and so on are buried in very small, grey print. Swapping mortgages is a nightmare - the volumes of paper work, the delving yet again into your personal affairs, exit fees as high as $1,000, hidden penalties for late payments, different types of loans. That does not mean there are not possible benefits, especially in looking beyond the Big Four.

Bank workers abused

Bank workers are on the receiving end of angry customers – long queues, long waiting times on the phone, difficulties in rectifying bank errors, whopping fees and penalties. Thousands of bank workers’ jobs have gone offshore over recent years. Bank staff are under pressure to sell debt with pay increases tied to how many new credit cards or other forms of debt they sign up. Their health suffers under pressure to sell debt products even when people don’t want or need them and may not be able to afford them.

The Finance Sector Union (FSU) has adopted a Charter for Better Banking (better-banking.org) calling on the government to take a number of measures including to stop banks offshoring jobs; to prohibit or limit the linking of pay to sale of debt products; for interest rate movements to reflect RBA rate changes; and for banks to demonstrate a direct link between their fees and charges and customer service provision.

The GetUp! group, the Australia Institute, CHOICE and the Greens are backing a class action, hoping to recoup billions of dollars overcharged in fees for bank customers. Greens leader Senator Bob Brown has introduced legislation to Parliament seeking to give some legislative protection to bank customers.

The Banking Amendment (Delivering Essential Financial Services for the Community) Bill 2010 includes provisions for minimising or removing fees from basic services, capping the level of mortgage exit fees, and introducing a variable rate mortgage product (“Fair Price Mortgages”) that would only permit genuine changes to the lender’s cost of funds to be passed on to customers.

The Communist Party of Australia, as a first step, is calling on the Australian government to establish a People’s Bank, a government guaranteed public bank based on a strong and democratic social charter that operates in the interests of the people and the economy. This would immediately introduce real competition and put pressure on the Big Four to slash fees and improve service.

Re-regulation of the financial sector is long overdue. The government should regulate interest rates, fees, capital flows and confine banks to banking with the many highly speculative practices that are not central to banking outlawed. It is also time for a super profits tax on banks.

A government that caved in to the mining corporations on the environment and a super profits tax is not about to stand up to the banks. Nor is the Opposition which also does the bidding of the big end of town.

It requires a government of a new type closely linked the people’s mass movements governing in the interests of the people. The process of breaking the two-party system has begun and needs to built on.  

Big Four Banks – Post-tax Monopoly Profits

Westpac $6.3 billion up 84%

Commonwealth $6.1 billion up 42%

ANZ $5.1 billion up 51.7%

NAB $4.2 billion up 63%

TOTAL: $21.7 billion

Average rate of return on equity: 15.9%

(No wonder the banks were crying poor – it was 20% prior to global financial crisis.)

Next article – Editorial – Brazil consolidates Latin America’s gains

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