Interest rates are too high, MPs tell banks

MPs yesterday attacked banks for not passing on interest rate cuts to customers while turning in high profits during a recession.

The rebuke came a day before the Reserve Bank reviews its official cash rate, which stands at 2.5 per cent, and days after some banks increased their long-term fixed interest rates.

Parliament's multi-party finance and expenditure committee said in a hard-hitting report that it was "concerned that some banks have not passed on the latest ... cut to the official cash rate in their interest rates for floating mortgages".

The committee urged banks to cut their rates as much as possible to "maximise the positive effect of the OCR cuts to the economy".

Banks floating rates are at around 6.4 per cent, and three of the four major banks have raised fixed term mortgages in the past week.

The committee also said it was very surprised to learn that despite the severe effect of the recession on businesses and households, bank profits had fallen only slightly, mainly "as a result of provisioning against future credit losses".

"We would expect that the banking sector would take on a greater role in sharing the burden of the current recession," the report said.

Cutting interest rate margins would help relieve the burden on mortgage holders and corporate borrowers.

"We consider that banks could further reduce interest-rate margins while maintaining an acceptable level of profitability."

The MPs statement was in response to the Reserve Bank's financial stability report, issued last month.

Although fixed term mortgage rates are influenced more by overseas wholesale money markets and domestic deposit rates than the cash rate, the Reserve Bank says its rate has significant effect on floating mortgage rates because of its influence on short-term wholesale rates.

Last month Deputy Governor Grant Spencer told the committee the bank was disappointed that so little of its 50-point cut to the cash rate in April was passed on to home buyers on floating mortgages.

Yesterday, the committee said it was "surprised and concerned" that longer-term mortgage rates had risen, "even though conditions in bank funding markets have started to ease".

While "credit spreads" - the premium banks pay for money on international markets - have continued to ease, basic longer term rates have risen, largely because of increased demand for cash from Government borrowers.

That has resulted in recent increases in local fixed mortgage rates.

Banks' recent results have shown big increases in losses on bad loans and money set aside to cover expected losses.

The committee said it understood banks' requirement to retain capital to remain in a strong position, but "we believe banks should not expect to maintain their usual rates of profitability in recessions, particularly when some sectors experience significant financial difficulties".

The committee also expressed concern at the prospect that the Australian-owned banks might have more stringent credit criteria for New Zealand businesses than parent banks applied to Australian businesses.

Labour finance spokesman and committee member David Cunliffe said the report reflected "strong and growing concerns that banks have not fully passed on interest rate cuts and may not be appropriately sharing the burden of the recession.

"The report is a strong statement of concern that the banking sector would do well to heed," he said.

New Zealand's largest bank, ANZ National, said higher wholesale funding costs and competition for deposits, as well as mortgage break cost had contributed to a quarter of a a percentage point decline in the net margin it earned on its borrowing and lending operations.

Its March half year profit was down 30 per cent on a year earlier.

"The effect of the domestic recession has been felt most significantly in the retail business where profit was down 21 per cent on the previous comparable period."

The bank said it recognised the importance of maintaining the flow of capital into the economy, but maintaining stability was of utmost importance.