Swan Warns Banks Not To Borrow Too Much Time

The Age

Monday October 6, 2008

Michelle Grattan and Matt Murphy

TREASURER Wayne Swan has warned banks they must pass on the benefits to families when their borrowing rates eventually fall again, as the Government defends their creaming off some of tomorrow's expected official cut by the Reserve Bank.

With the battle raging over what the banks can and should responsibly do, Peter Costello has backed Opposition Leader Malcolm Turnbull's argument that the cut - expected to be up to 0.5 percentage points - should be fully passed on. The former treasurer said the Government was working up to the banks giving customers only 30-40 basis points of it.

Deputy Prime Minister Julia Gillard said the Government was "prepared to take a poll hit to do the right thing" (that is, afford the banks some slack because of the escalation of borrowing costs).

Feeling the political heat as borrowers face only partial benefit from the coming cut, Mr Swan last night said: "We absolutely expect banks to pass on the maximum amount of any rate cut that is responsible in the light of the recent upheaval in the global economy.

"But when global markets stabilise over time, banks will have absolutely no excuse not to pass on their lower funding costs to families."

Earlier, Mr Costello told the ABC the banks had increased their margins on five occasions this year by a total of 50 basis points. "They're already in front, they're highly profitable, they're well capitalised," he said.

Mr Swan should say what level of profitability would be sufficient and "will there be any occasion for the consumer or the borrower to get back this increased profitability when circumstances change", Mr Costello said.

The banks continued to signal they would hold back some of the likely cut.

ANZ chief executive Mike Smith said it was in nobody's interests to keep rates high. "However, I have to thumb the book and I'm running a business," he said. "So, we will have to wait and see."

A Westpac spokesman declined to comment when asked about Mr Costello's view, but said: "I think people need to understand that funding is more expensive then it has been throughout this crisis."

Mr Swan's office buttressed the Government's case by releasing a Treasury analysis showing the difference between the expected cash rate and what the banks have to pay for their money is six times greater than before the credit crunch began last year.

But shadow treasurer Julie Bishop said Mr Swan should stop acting like the chief executive of one of the big banks.

She also challenged the banks "to step out from behind Mr Swan and tell the Australian people why they should get the benefit" ahead of borrowers who need relief.

Senior sources confirmed a weekend News Ltd report that Reserve Bank Governor Glenn Stevens had agreed, in a conversation with the Prime Minister on Friday, that it was in the best interests of the banking system for the banks to retain some of the rate cut.

© 2008 The Age

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