Link Between Lending Rate And Central Bank Rate A Myth

Post by Sharat on April 4, 2012 · Under banking, Business News · Comment

The link that is supposed to exist between the Australian central bank set interest rate and the rates charged by commercial lenders is a myth that is need of being busted according Phil Chronican who runs the ANZ’s domestic Australian business.

Mr. Chronican says that since the 2008 financial crisis, the funding costs of banks have risen and are increasingly disconnected from the interest rate set by the RBA.

Speaking at a luncheon organized by the American Chamber of Commerce, Mr. Chronican said that no automatic link exists between the rates that banks lend to one another overnight, and what is appropriate to charge for a 25 to 30 year variable rate mortgage.

“That linkage, if anything, only arose in the early 1990s and persisted in a period of extended stability in financial markets,” Mr. Chronican said.

“And I’ll be frank here. I think the banks let this persist because it was convenient for them.

“It saves having to explain why home rate loans are going up and down when there was an easy scapegoat to be had by always blaming the RBA.”

ANZ now looks at the costs of all its funding, and no longer simply considers the RBA cash rate. This means the cost of both international and domestic whole sale funding, and the cost of retail deposits need to be factored into its lending rate.

Mr. Chronican claims that another myth is that the higher cost of funding is the reliance on international wholesale markets. The major source of funding for banks is in fact domestic retail deposits, which have required higher interest rates as a result of intense competition.

Mr. Chronican went on to defend banker salaries, saying he was baffled by the fact that Australians have no problem with excessive pay of athletes, entertainers or entrepreneurs, but seemed to despise the pay of executives at banks.

He added that disclosure of compensation of executives who work at listed companies is important for transparency.

“Maybe we should look to extend the disclosure to other groups who are in positions of power in their community, including those who are managing public superannuation savings,” Mr. Chronican said.

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