BANKS Back in your box, Mr Swan

By InvestSMART · 10 Feb 2012

By InvestSMART ·
10 Feb 2012

Comments

IF SUPPORTERS of Wayne Swan think his incessant bank-bashing serves this country's interests, just wait till the banking industry has been brought to its knees like its European counterparts because of interference by politicians and the general public into something they know nothing about. It should be recognised that only a third of the population have mortgages. If bank-bashing continues, we will end up with lower interest rates on deposits, lower dividends, higher charges and a credit squeeze that will make it near impossible to get a loan. Where is the shadow treasurer, Joe Hockey, in all this? Does he believe that the Treasurer is correct? So much for any hope of competent financial management of this country now or into the future.

Seeing that the banking industry makes not even 3 per cent return on invested funds, it is absurd for it to rush into making decisions on interest rates because media outlets, unionists, politicians and others demand it. It's time the banks stood up and told politicians and others to stick to issues they know something about.

Gil Solomon, Dover Heights, NSW

Taking the safe route

I WONDER what the many, including Wayne Swan, who partake in the national blood sport of bank bashing, would think if our banks followed the reckless lead of our international counterparts by rendering their superannuation depleted and bank savings threatened or wiped out, and lent what precious money they have to crooked and inept governments (such as Greece) and corporations (such as WorldCom).

David Ewens, Blackburn

Bottom line is investors

MAJOR banks are a business and as such must make a profit. It does not matter what the politicians on both sides of the house say about what the banks should or should not do when it comes to interest rates, they will do and say whatever it takes to maintain their profit margins. Try getting the tens of thousands of mum-and-dad shareholders to happily accept a reduction in their dividend cheque. I am sure all of us have a friend or neighbour who has shares in one of the major four banks ask them the question and see what their reaction is. Ultimately, it is these investors that the banks have to answer to.

Ian Brown, Ashburton

Consider the cash flow

IT IS disappointing that in Reserve Bank governor Stevens' statement on the unchanged cash rate there is no indication of the possible effects of Australia's relatively high interest rates on inflows of foreign capital. Financial market reports suggest that foreigners have been encouraged to invest in Australia where there is little exchange rate risk. This may help account for the exchange rate being higher than the RBA assumed. If that is the case, the situation may now have been reached where the cash rate could be lowered further and where, subject to rates on their extensive overseas borrowings, our banks could also cut domestic rates without reducing profit margins. It is hoped that the RBA will review this situation when it next considers the cash rate.

Des Moore, South Yarra

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Frequently Asked Questions about this Article…

What do commentators mean by 'bank-bashing' and why is it a concern for everyday investors?

Bank-bashing refers to public and political criticism of banks (for example from figures like Wayne Swan). Commentators in the article warn that sustained attacks on banks can lead to worse outcomes for everyday investors and depositors — such as lower deposit rates, smaller dividends, higher fees and a tightened credit market — because banks may react defensively to political pressure and shifting public sentiment.

How could continued criticism of banks affect my savings and access to loans?

According to the piece, ongoing public and political pressure on banks could push them to protect profit margins by lowering interest paid on deposits, cutting dividends, increasing charges and tightening lending standards. That combination could mean lower returns on savings and more difficulty obtaining a mortgage or other loans.

Are Australian banks earning large profits that justify public criticism?

The article notes that the banking industry was reported to be making around a 3% return on invested funds, suggesting that commentators see that as a modest return. Some writers argue it’s therefore unhelpful for politicians and media to demand immediate rate changes or to unduly influence banking decisions.

Why do some writers defend banks as businesses that must make a profit?

Defenders point out that major banks are commercial businesses responsible to tens of thousands of retail shareholders. They argue banks need to protect profits to pay dividends to 'mum-and-dad' shareholders, so political demands to change pricing or rates aren't straightforward for banks to accept without affecting investors.

What role do foreign capital inflows play in Australia’s cash rate and exchange rate?

The article highlights that relatively high Australian interest rates have encouraged foreign capital inflows because investors see little exchange-rate risk. Those inflows may have contributed to a stronger exchange rate than the Reserve Bank expected, which in turn could influence decisions about lowering the RBA cash rate.

Could Australian banks cut domestic lending rates without hurting profit margins?

Some commentators in the article suggest that, depending on the cost of banks’ extensive overseas borrowings, banks might be able to reduce domestic lending rates without materially reducing profit margins. The point is presented as a possibility for the RBA and regulators to consider.

What do writers want from the Reserve Bank (RBA) when it sets the cash rate?

Letter writers urge the RBA — and specifically reference Reserve Bank governor Stevens — to consider the effects of foreign capital inflows and the stronger-than-expected exchange rate when assessing the cash rate. They suggest these factors could mean the cash rate can be lowered further.

What should everyday investors watch for in response to the banking debate and RBA decisions?

Based on the article, investors should monitor RBA cash-rate decisions and commentary about foreign capital inflows and exchange rates, keep an eye on bank announcements about deposit rates and dividends, and be aware that political pressure can influence bank behaviour. Talking to fellow retail shareholders and staying informed can help ordinary investors understand how these dynamics might affect their savings and shareholdings.