Posted by John, December 7th, 2011 - under Nationalisation, Profit rates, Profits, Super profits.

Tags: Bankers, Banks

So the Reserve Bank of Australia (RBA) has cut the cash rate by 0.25% and the big four banks have so far refused to pass any of the cut on to mortgage and business customers.

The Commonwealth, ANZ, Westpac and NAB, all acting (or rather not acting) suspiciously in the same way, have done this because, according to the Rich Bankers Union, the cash rate is not really connected to their borrowing costs.

Well, that is bullshit. 67 percent of their borrowing is done from Australian sources and the cash rate influences those lending rates. Here is what the RBA says:

Movements in the cash rate are quickly passed through to other capital market interest rates such as money market rates and bond yields. These interest rates are also influenced by the risk tolerance of investors and preferences for holding funds in a form that are readily redeemable. The cash rate and other capital market interest rates then feed through to the whole structure of deposit and lending rates. In Australia, most deposits and loans are at variable or short-term fixed rates, so there is a high pass through of changes in the cash rate to deposit and lending rates. But because of the other factors influencing capital market rates, and fluctuations in the level of competition in the banking sector, deposit and lending rates do not always move in lockstep with the cash rate.

Ah, so why won’t the banks pass on the rate cut in full this time? They are worried about what is happening in Europe.

Their borrowing costs will fall a little a a consequence of this RBA decision to cut the overnight cash rate by 0.25% but the big 4 banks are using the extra profit as insurance if Europe goes belly up. In other words they are making us pay for the instability in Europe.

And how did that instability come about? European states and the US state stepped in to save their banks and other financial institutions from collapse during the GFC in 2008/09.

So workers’ tax money saves the banks; governments get into trouble because of that, borrow and then attack workers to pay again for rescuing the banks. Maybe it’s time the banks paid for their system’s failures instead.

Maybe it’s time for a super profits tax on the banks.

Economic rent (super profits) is a wonderful concept. It just means that capitalists are getting a return well above what would be required to get them to invest in the particular activity.

Monopoly or quasi monopoly is one of the main causes of economic rent. The GFC strengthened the position of the big 4 banks in Australia. Non-bank competitors disappeared and the big 4 swallowed up some smaller competitors. They became more powerful.

The level of super profit in part depends on risk. Mining for example is risky. Say the return necessary to get mining companies to invest is 13% (7% above the current long term bond rate). Yet it appears the return to mining companies is on average about 20%.

In other words taxing the profit above 13%, even a large part of it, won’t impact on the mining companies’ decisions to invest, and how many jobs etc there will be.

They would have done it for a 13% return so taxing part of the extra return won’t stop them doing that.

The return on equity this 2010/11 year for the big 4 banks, with less risk, is, according to Australian Banking and Finance, ‘16.7 per cent compared with 15.9 per cent full year 2010.’

They rank second in Australia after the mining companies in terms of return on investment. Banking is not as risky as mining, especially when you have governments around the world (including Australia if it got to that) prepared to pile our cash into them and guarantee deposits if needed.

Now the Big 4 Banks are saying they can’t pass on the recent RBA interest rate cut. Let’s have a look at how poor the banks are. Here’s what Eric Johnston wrote in The Age a few months ago:

AUSTRALIA’S big banks are ranked as some of the most profitable in the world while the sector continues to boast among the widest interest margins of global peers.

The findings, contained in the latest annual report of the Bank of International Settlements, are expected to rekindle the debate about the profitability of Australia’s big banks.

He went on to say that based on interim profit reports the big 4 banks were on track to deliver $22 billion of profits and that their interest margins – the difference between the Rae they end at and the rate they borrow at – were among the highest in the world.

The reality was even greater profits. Here is how Australian Banking and Finance described it:

The majors’ cash profit after tax of $24.2 billion for the 2010-11 year was up 11.5 per cent from last year’s result, according to KPMG’s survey of major Australian banks. Statutory profit before tax was $31.9 billion for 2011, compared to $28.5 billion in 2010.

The failure to pass on any cut means they will be extending their margins and making bigger profits.

Instead of workers benefiting from mortgage rate cuts and business from lower business rate costs, the banks will protect their nest eggs even more and add to them.

Oh, and did I mention, Australian banks are the most profitable in the world. The most profitable in the world.

So here we have the most profitable banks in the world, the big 4 Australian banks with $31 billion in profits, not prepared to pass on a 0.25% overnight cash rate reduction to their customers on their home and business loans.

Soak the bastards, Treasurer. Hit them with a super profits tax, or threaten to do that.

And when they claim that that would impact on their costs of lending and would need to be recouped, threaten them with interest rate controls and mention you might set up a people’s bank. Oh, I forgot, we used to have one of them until the previous Labor Government flogged it off.

Maybe we should nationalise the banks under workers’ control instead.