Bollard's secret not from Muldoon's toolbox

Alan Bollard. Photo / Mark Mitchell

Luckily for us, Alan Bollard is no Robert Muldoon. The feeling of frustration was thick in the air of Parliament's Committee Room 3 on Thursday afternoon.

Politicians from both sides of the finance and expenditure select committee kept asking Reserve Bank Governor Bollard what he could do to force the big four Australian-owned banks to cut their short-term mortgage rates. They kept asking: "Can't we do something about this?"

Which clause of the Act would allow him to do something? What could he do to drag the banks' rates down? Were they co-operating? How much "super profit" were they making? Bollard batted every question back. A tall, angular man in a grey suit, he either played a copy-book forward defensive shot or let the questions go through the keeper.

Bollard told the committee members he was also frustrated the banks hadn't come to the party and passed on all 575 basis points of Official Cash Rate cuts to short-term mortgage borrowers.

Only about 450 basis points of the cuts have been passed on to floating and six-month borrowers.

The Governor said, earlier in the morning, he believed they now had room to pass on the cut.

Financial conditions on global credit markets had eased and the banks' average weighted cost of funding had reduced, meaning their profit margins on lending were above normal.

But, he said, there were no easy ways to force the banks to move. They discussed the various clauses that could be used and Bollard acknowledged in desperate times the Finance Minister, Parliament and eventually the Reserve Bank could do anything they liked. He called it the "atomic option" of simply regulating the rates lower.

At this point Bollard, who is old enough to remember the little man with the big head, said he did not want to return to a Muldoonist era.

This is the spectre at the heart of the debate about bank interest rates - do we really want to direct banks to charge specific interest rates?

But there is one step he could take. Bollard hinted he had the information that would show in gory detail how much "extra" profit the banks were making.

He declined to divulge how much the banks' margins had improved in recent months and how much their funding costs had fallen. It must be very fresh if he does have it.

The Reserve Bank's own figures from its Financial Stability Report last month show that bank interest margins as a percentage of average interest earning assets rose to 213 basis points in the December quarter from a record low of 208 basis points in the September quarter.

This was still below the 217 basis points in the same quarter a year earlier and down from a June 2003 peak of 260 basis points.

Bank profits in the six months to March 31 have fallen around 20 per cent and three of the four banks reported lower interest margins for the period.

The Reserve Bank must have seen a significant improvement in April, May and June. If it has, it should disclose the overall number to the public to embarrass the banks into moving.

Bollard promised the committee he would look at whether he would give them the information. He should give us all the information. Embarrassment may be the best monetary policy tool he has left.