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Banks to face Parliament

As an alternative to a banking Royal Commission, the Prime Minister, Malcolm Turnbull, has announced that the Big Banks need to explain their pricing rationales

Hot on the heels of Australia’s official cash rate being lowered to an historic 1.50%, the Prime Minister has announced that  Australia’s major banks will be called to appear at least annually before the House of Representatives Standing Committee on Economics to enable the Committee to report jointly to the Treasurer and the Parliament on Australia’s banking and financial system.

“The Government recognises that at all times and particularly in challenging economic times globally, it is important that Australians retain faith in our financial institutions and the decisions they are taking,” said Mr Turnbull.

“The Australian economy depends critically on the performance and strength of our banking and financial system. Banks operate under a social licence and have responsibilities to the Australian public.”

In particular the banks will be required to explain:

  • International economic and financial market developments and how these are affecting Australia
  • Developments in prudential regulation, including capital requirements, and how these are affecting the policies of Australian banks
  • The costs of funds, impacts on margins and the basis for bank interest rate pricing decisions
  • How individual banks and the banking industry as a whole is responding to issues previously raised in Parliamentary inquiries through their package of reforms announced in April 2016
  • Bank perspectives on the performance of the Australian economy, including strengths and risks

The appearance by the banks will ensure they have the important opportunity to transparently account for their decision making and how they balance the needs of borrowers, savers, shareholders and the wider community.

Since the RBA cut to official cash rate in August, the Big 4 banks have faced media criticism for passing on less than half the rate cut to borrowers. And whilst three of the Big 4 did increase 1,2 and 3 year term deposit rates, the cost to the banks of these increases would be less than the cost of passing the cut through to borrowers.

“This week the Treasurer and I have called on the banks to pass on the full Reserve Bank interest rate cut. They have not done so. We have said that they must be fully accountable for this and they should, if they are not prepared to pass it on to the full extent, then they should explain fully and transparently to the Australian people and their customers why they have not done so,” said Mr Turnbull.

Striking a defensive note in response to the government’s announcement, the Australian Banking Association (ABA) noted that while the Federal Government was entitled to call the banks before a parliamentary committee, no other businesses are required to justify their commercial pricing decisions in this way.

“We are confident banks can explain why the interest rates they set for borrowers are determined largely by the costs of funds and the pressures of a highly competitive market, not the Reserve Bank cash rate,” said ABA Chief Executive Steven Münchenberg.

“Since the start of the global financial crisis, over eight years ago, the Reserve Bank’s cash rate has not mirrored the actual funding costs of banks. Banks have explained repeatedly why the Reserve Bank does not set interest rates.”

Taking a more conciliatory tone, NAB’s CEO, Andrew Thorburn said that NAB was looking forward to the dialogue around how it balances the needs of borrowers, depositors, investors and shareholders.

“I am proud to be a banker. It has always required carefully thought through decisions, but the focus has been on serving the many people who rely on us to get these decisions right,” he said.

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