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Prime Minister Accuses CBA Of Price Gouging
The Federal Government says it believes that the Commonwealth Bank of Australia (CBA) engaged in price gouging when it raised the interest rate on its variable rate home loans despite enabling banks to reduce the cost of funding by offering sovereign guarantees.
Prime Minister Kevin Rudd has suggested that the cost of raising funds on the bond markets as well as inter-bank funding has declined sharply as a direct result of the Federal Government guarantee.
The equity market however cheered CBA’s decision to raise its variable rate mortgages and fixed rate loans by 10 basis points with CBA shares rallying by 1 per cent on Monday despite the broader marketing declining.
Mr. Rudd said CBA was able to issue bonds last December through the use of the sovereign guarantee at a cost of just 160 basis points above the bank bill swap rate inclusive of the government fee for use of the guarantee.
“As of 14 April 2009 – that is after the government’s guarantee came into operation – the spread on the CBA issue was down to 123 basis points,” Mr. Rudd said.
The Prime Minister said that credit spreads continued to fall after the Government introduced the guarantee, with credit spreads on CBA debt falling by 121 basis points between the immediate aftermath of the Lehman Brothers bankruptcy and the end of May.
The Australian Bankers Association chief David Bell expressed support for CBA’s decision by saying that the best course of action for banks is to operate commercially.
“One of the reasons we have such a strong banking system is our banks have lent properly and have been allowed to make commercial decisions,” he said.
Mr. Bell said that Australian banks had passed on to their customers 385 basis points of the 425 basis point cuts in official interest rates. Mr. Bell made the point that the proportion of cuts passed on was pretty good considering that Australian banks raised a large percentage of funding on wholesale international markets, where interest rates do not move in tandem with RBA interest rate moves.
Mr. Bell rejected the notion that banks were obliged to set interest rates as a result of the Federal guarantee on wholesale funding, saying that banks had paid the government fees for the use of the guarantee.
“Banks have paid the government $700 million for the price of using that guarantee,” he said.
One banking analyst noted that funding costs for banks had appreciated significantly as banks competed aggressively for deposits to replace previous wholesale funding through higher margin interest rates. The analyst added that pressure would continue as investors retreat from guaranteed deposits in order to seek higher returns from the equity markets.
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