Parliament's Finance and Expenditure Committee has issued a report challenging New Zealand's Australian-owned banks to pass on more of the April 30 cut in the Official Cash Rate and to treat New Zealand businesses fairly. The committee said in its report into the Reserve Bank's May Financial Stability Report that it was surprised bank profits had not fallen further in the last year.
"We are concerned that some banks have not passed on the latest 50-basis-point cut to the official cash rate (OCR) in their interest rates for floating mortgages. The Reserve Bank was disappointed at the response of the banks' floating mortgage rates to the latest OCR cut -- only two major banks, Westpac and ANZ National, have reduced their floating mortgage interest rates significantly," the Committee said, adding however that a large portion of the 575 basis points of cuts since mid 2008 had been passed on. "In view of our concern that OCR cuts are not being passed on in their entirety, we asked why mortgage rates do not appear to reflect the price that the New Zealand banks are paying to fund their mortgage lending," it said. "The Reserve Bank commented that longer-term mortgage rates are influenced more by overseas term rates and deposit rates than by the OCR. However, the OCR has a significant effect on floating mortgage rates through its influence on short-term wholesale rates," it said. "We are surprised and concerned that longer-term mortgage rates have risen recently, even though conditions in bank funding markets have started to ease. The Reserve Bank explained that international swap rates increased at the same time as many banks and Governments raised funds from the markets. As a result, longer-term rates remained high." "To maximise the positive effect of the OCR cuts on the economy, we urge banks to pass on OCR cuts to their interest rates to the maximum extent possible," the Committee said. "We were very surprised to learn that despite the severe impact of the current recession on business and household liquidity, bank profits declined only marginally in the past year, and principally as a result of provisioning against future credit losses." The committee said it "would expect that the banking sector would take on a greater role in sharing the burden of the current recession." "Reducing interest-rate margins can help relieve the burden on mortgage holders and corporate borrowers. We consider that banks could further reduce interest-rate margins whilst maintaining an acceptable level of profitability," the Committee said. "In view of the relative resilience of profits in the banking sector, we are concerned that taxpayers are, in effect, subsidising banks through the Government's retail deposit guarantee scheme. The Reserve Bank agreed to a certain extent. In contrast, the Reserve Bank did not see the wholesale funding guarantee facility as an effective subsidy, because banks accessing funds from this facility have to pay "market rates"." The Committee's report said "some of us consider it vital that banks neither insulate their profit margins nor charge excessively high interest rates at the expense of the real economy and the taxpayers, because of the potential adverse consequences for businesses and households." "The Reserve Bank noted that banks' behaviour tends to be pro-cyclical-providing easy access to credit in booms, tightening credit supply in downturns," it said. "The Reserve Bank said that it has discussed interest rates and profit margins with the banks. We encourage the Reserve Bank to continue to work closely with the banks to help provide credit to the economy on reasonable commercial terms that reflect monetary policy settings and prevailing market conditions." The Committee also said it was vital the "Australasian banks treat Australian and New Zealand firms on an equal footing." "The Reserve Bank commented that Australasian banks might offer different lending terms to Australian and New Zealand firms because the New Zealand subsidiaries of Australian banks operate separately from their parents. However, the Reserve Bank pointed out that both Australian firms and New Zealand firms face difficulty obtaining credit," it said. The Reserve Bank was investigating whether banks had unreasonably withheld credit supply. "It assured us that it is pressuring local banks to continue lending to creditworthy customers on reasonable terms," it said. "We encourage the Reserve Bank to continue monitoring closely the lending terms offered by Australasian banks to New Zealand firms." Here is new ANZ National CEO Jenny Fagg interviewed by Sean Plunket on National Radio. My opinion on this issue is here.