Last Thursday's 25 basis points cut in the Official Cash Rate by the Reserve Bank has led to an unexpected response by banks.
Some of them have cut their term deposit and savings account rates already.
But some of them have not passed on all the rate cut to their floating rate borrowers.
This holdback has surprised many.
And it has annoyed the regulator (Reserve Bank) and opposition politicians. And now the government is starting to sound annoyed.
In fact, one bank - BNZ - has not cut its floating rates for borrowers at all yet.
Will it?
BNZ, like others, just say their rates are "always under review".
Delay, and discounting the benefits of a rate cut to customers seems to be a new banking tactic.
One way to understand the attractiveness of these delays and holdbacks is to work out how much money is involved.
There is $215 billion of housing loans outstanding as at the end of January, according to Reserve Bank data.
23.5% of this is on floating terms, or $51 billion.
The latest disclosure statements from the main five banks are our primary source of how we cost these holdbacks. That data is older and less than the Reserve Bank data, but it remains a useful benchmark.
The bottom line is that every day banks don't pass on the rate cut, they retain $327,000 of additional margin. Each week that is more than $2.2 million.
Some banks have passed through all the OCR benefit to their customer (like the Co-operative Bank), some most of it (like ASB and Kiwibank who retained 5 basis points), while others kept most of the OCR reduction (like ANZ and Westpac).
Then there are still others who haven't announced any decision (like BNZ). Theoretically they could keep it all.
The attraction is strong.
This table sets out an estimate of how much each bank gains from these hold-backs.
| Institution | Total mortgage lending |
portion that is floating |
Daily value of 0.25% interest |
|
| NZ$ bln | NZ$ bln | NZ$ | ||
| estm | approx | |||
| ANZ | 68.7 | Sep-15 | 16.1 | 110,500 |
| ASB | 45.6 | Dec-15 | 10.7 | 73,400 |
| BNZ | 32.4 | Sep-15 | 7.6 | 52,200 |
| Kiwibank | 13.9 | Sep-15 | 3.3 | 22,300 |
| Westpac | 42.5 | Sep-15 | 10.0 | 68,500 |
| ------------ | ----------- | |||
| Total main banks | $203.2 | $327,000 |
These banks have announced a wide range of pass-throughs of the OCR cuts to borrowers. After they are in place, here is the left-over portions they will be retaining for themselves.
| Amount of OCR Cut held back |
Date effective |
Value of holdback per day |
|
| NZ$ | |||
| ANZ | 0.15% | March 29, 2016 | 66,300 |
| ASB | 0.05% | March 24, 2016 | 14,700 |
| BNZ | 0.25%* | * no announcement yet | 52,200 |
| Kiwibank | 0.05% | March 24, 2016 | 4,500 |
| Westpac | 0.15% | March 29, 2016 | 41,100 |
| ----------- | |||
| Total main banks | $ 178,700 | ||
| Annual gain | $62.2 mln |
(Also see Gareth Vaughan argues banks not passing on the full 25 basis points OCR cut is not justified).
14 Comments
I'm sorry, but is this article outlining the economic prudence of the banks or appealing on a socially ethical level?
Simple elasticity and market power. I don't blame them for holding their rates as long as expected economic profit is greater than expected economic costs.
I agree Steven, how tight is the trip wire? How bad does it get before people are compelled to act? As we see reported on this site, it is already quite bad. The problem is, for all their excuses on why they (the Government) shouldn't act, the delay caused means the damage done is more extreme before any thing is done. Regulation would limit this by placing constraints on the systemic swings. As it is, recovery will be long and hard, with more falling beside the way as it occurs.
Incorrect. Obviously the customers they don't have more power or we would see lending rates mirror the OCR relatively rapidly. There would be a significantly lower potential for arbitrage than what was shown.
I would blame you for legislating to limit financial or economic profits. Why? Because it is a fundamentally absurd answer to the 'problem'. I mean, why stop at banks? - why not limit the earnings potential of all businesses; small, medium, large. Who cares what business you are, you can only earn so much economic or accounting profit.
It only takes a brief understanding of economics 101 to comprehend what economic turmoil such regulation would have in the medium and long run.
I suspect they may not pass on all the drop in the OCR simply because of the current uncertainty . With the issues in the dairy industry in NZ and the mining, farming and dairy industries in Australia it would prudent to not pass on the cut. In the end what can the government do.....
Banking Licences - what's so hard - complicated legislation is not needed
Can't believe how slow NZ lever-pullers are
Anybody who has been paying attention will be aware that at least 4 times over the past 4 years, I have advocated an annual banking licence fee of $½ billion per annum per bank to hang up their shingle
No traction
http://www.interest.co.nz/opinion/71372/bernard-hickey-says-capital-flo…
http://www.interest.co.nz/opinion/74735/bernard-hickey-argues-reserve-b…
Now make it a 2 tiered licence fee - rising to $1 billion for those who dont play the game
You want to drive a vehicle on nz roads, you need a drivers licence, pay an annual registration-licence fee for the car and get the ritual WOF. You want to park somewhere, that be another fee. You might even cop a few speeding fines along the way.
There are some activities where you can please yourself - no consequences - such as this
Burglar with more than 38 burglary convictions gets a free-pass, no jail-time, simply carry on
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11603568
There is another weapon available to Government that requires little legislation and would I suspect have widespread support politically and from the population - a special " temporary " tax on Bank windfall profits from failing to pass on interest rate cuts on loans and reduction of deposit interest paid. A 100% charge would be a good start arbitrarily fixed by IRD as they much experience in arbitrary decisions . The time is close when Corporate bullies will experience the wrath of their customers who live in the same community as the managers.
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