Consumers revolt against bank robbery

May 27, 1992

By Peter Boyle

The banks' latest attempts to hit credit card holders with more charges has driven the Australian Consumers Association to call a national day of protest against the banks for June 2.

Whether you are struggling with a home mortgage, caught in the credit card trap or a modest saver watching the multiplying bank charges eat up what little interest your account earns, you are not alone if you feel that you are being fleeced.

There are widespread suspicions that the banks have failed to pass on recent official interest rates cuts, and that small customers being forced to pay for the bad debts of the "entrepreneurs" who defaulted on their massive debts built up in the 1980s.

Predictably, the banks deny these allegations. They are making only a modest profit, they claim. But Australian banks were some of the most profitable in the world in 1990, according to figures compiled by the Washington-based Bank of International Settlements, the OECD and the United States finance giant, Salamon Brothers. Their profitability (measured as return on equity) was 13.9% compared with 12.4% for French and Japanese banks, 10.2% for German banks, 8.6% for US and a mere 6.9% for British banks.

This exceptional profitability is not due to the Australian banks' superior efficiency or business acumen. Indeed Australian banks carried the second biggest proportion of bad debts in the western world in 1990. Only in Norway were they higher.

Australia's banks are exceptionally profitable because their net interest margin — the difference between the interest they pay on the money deposited with them and the interest they collect on funds they lend out — is higher than in most other countries.

The net interest rate margin, or spread as it is also called, averaged 3.5% for Australian banks, the largest in any western nation except Spain, according to the Bank of International Settlements. In its May bulletin, the Reserve Bank of Australia tried to defend the banks by pointing out that by its calculation, Australian banks' interest rate margins had shrunk from a high of 5.3% in 1987-88 to 3.8% in 1990-91. But this is even higher than the estimate by the Bank of International Settlements.

While the federal parliament's Martin Committee (inquiring into banking practices) report A Pocket Full of Change, released last November, could find "no conclusive evidence" that "retail customers as a class have generally been subsidising > an earlier federal Treasury study, which has not been made public, found that the banks had skimmed off about $1 billion in extra revenue through keeping interest rates high in 1989, according to then treasurer Paul Keating.

A 1990 study by R. Milbourne and M. Cumberworth of the University of NSW found that corporations had gained from deregulation of the finance sector while retail customers had lost. Deregulation sparked a burst of competition to lend to corporations in the late 1980s, but the domestic end of banking remained tightly controlled by the big four oligarchy — National Australia Bank, Westpac, ANZ and the Commonwealth Bank.

The banks certainly do not fleece all their customers equally. For instance, official interest rate cuts since January 1990 have been passed on unevenly to different classes of borrowers. The rates for 90-day bank bills, used mainly by large corporate borrowers, have fallen nearly 10%, while mortgage rates have fallen only 6%. Interest rates on credit cards have not fallen from the 22-23% level, where they have been for years. The banks promise to cut these rates by 1-1.5% in July or August.

But even this modest cut in credit card interest rates is not going to come without a cost to the one in two Australians older than 15 years who have at least one credit card and owe a collective $4.33 billion on them. After state and federal finance ministers agreed on May 1 that new uniform legislation would allow the banks to charge annual fees on credit cards, the banks are now demanding the right to impose additional "transaction fees" on the use of credit cards.

The banks claim that credit card operations will not be profitable if they don't have their way but the Australian Consumers Association says that the banks could cut credit card rates by 6% and still make a profit.

Allen Cullen of the Australian Bankers Association told the May 17 Sunday Age that the problem was the 30% of credit card holders who took advantage of the 30-day interest free period to escape paying interest on their credit cards. Having used this to entice people into taking out credit cards the banks are now threatening to eliminate the interest-free period.

The banks' pushiness reflects their enhanced power after the shake-out that followed the collapse of the speculative boom in 1989. While several state banks went under (and taxpayers are still shouldering the pain for this in Victoria and South Australia), the big four have ended up with much greater equity in all sectors of the economy, from television stations to public utilities.

By the end of 1990, the total assets of all banks in Australia was $330 billion, three times the 1986 figure. The big four . The cost of the recent corporate crashes to the banks is estimated at about $10 billion. Their loan loss provisions in 1990 were only 1.06% of their total assets, according to the Bank of International Settlements. While this was high by international banking standards, perhaps it only shows what a lurk banking is.

Casino bank

MELBOURNE — The Kirner Labor government introduced a bill on May 19 which would allow banks to open a new kind of account, called a "premium savings account". All the interest would be pooled and given each week or month to a handful of randomly picked lucky "investors" — after the government takes 25-30% and the bank a further cut. The unlucky depositors get no interest. Apparently accounts like these are operating in Britain and New Zealand, and the ANZ Bank has a system ready to go. According to ANZ spokesperson Matthew Percival, the accounts are designed to add to long-term savings by encouraging depositors to leave their money in their accounts in the hope of winning a premium.

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