Treasury rejects bank 'gouging'

After a recent report showed the big four banks were the most profitable in the developed world, they said they were still feeling the effects of the global financial crisis, and this had prevented them passing on official rate cuts in full.

The executive director of Treasury's markets group, Jim Murphy, yesterday said the financial system was going through a "transition," which had increased banks' dominance of the home loan market. Reflecting this, 88 per cent of new home loans were written by banks in June, figures showed yesterday.

Despite this dominance, however, Mr Murphy said competition remained healthy, and big bank lending margins were "around long-term averages". "Their profit levels are no greater over a long period of time than other major corporates," Mr Murphy said. "That's a matter for the community and the government to decide whether that's too high a profit, or OK."

His comments come after the Bank for International Settlements said in June that the big four's ratio of profits to assets was the highest in the developed world, at 1.19 per cent.

Mr Murphy's testimony kicked off three days of hearings that are likely to put big banks under pressure to explain their unpopular decisions on interest rates, with the Commonwealth Bank, Westpac and ANZ set to appear in Sydney today.

Lenders were also accused of issuing home loans to thousands of people who could not afford them by the president of the Banking & Finance Consumer Support Association, Denise Brailey.

Mr Murphy's comments on bank profits come as bankers privately say the government has become more accepting of their claims of higher funding costs.

In 2010, shortly before the government announced reforms to lift competition in banking, Mr Murphy questioned if banks should be absorbing the extra costs caused by the global financial crisis.

Yesterday, he said the reforms were having a positive impact, with big lenders losing $16.6 billion in lending business to smaller rivals since late 2010.

The chief executive of the Australian Bankers' Association, Steven Munchenberg, argued the rise in global credit costs caused by the financial crisis had presented banks with a tough balancing act as they needed to pay more for deposit funds.

"Banks need to balance the concerns of borrowers on the one hand, with the interests of savers, including retail depositors and superannuation funds, on the other," Mr Munchenberg said.