Inside Money: Slowly, the margin creeps up

On the golf course by 3pm. Photo / Thinkstock

Alerted by a change in signage I noticed the financial institution down the road from me has recently upgraded its status from building society to bank.

Briefly, I wondered why until I remembered that banks can make more money than building societies.

Building societies are almost not-for-profit ventures formed for the benefit of members-only whereas banks... they just want to make as much money as possible for shareholders.

And the gross measure of how much banks are squeezing out of their customers is the interest rate margin - the gap between rate they borrow at and what they charge us for the privilege of using money.

The old joke has it that bankers operated to the 363 rule that is - borrow at three, lend at six, be on the golf course by three.

Still funny after all these years but is it true today? According to a new series of data published by the Reserve Bank, the 363 joke might need amendments. The Reserve Bank figures show that retail bank interest margins have hovered around 2 per cent for most of this year but against a steadily rising trend.

From a low of 1.85 per cent in October 2009 the retail bank interest margins crept up to 2.12 per cent by August this year. This might be a sign that the banking system is slowly edging back to pre-crisis normality where banks take profit with ease.

There are alternative explanations. This one from the UK Building Society Association puts a different spin on the interest margin blow-out pointing out that, amongst other things, "it is clear that margins two or three years ago were at an historic, unsustainably, low point".

"Even if we had not had a severe banking crisis, margins would have risen as pricing became more sensible after excessive competition had driven them down beyond their long-term average," the article says.

What time is golf?