Banks refuse to pass on interest rate cut

The big banks have failed to pass on the latest interest rate cut in full, blaming the cost of funding from overseas. Do their claims hold water?

Three of the four big banks passed only a fraction of the latest interest rate cut, while the NAB kept it all. The banks argue the spiralling cost of funding from overseas compelled them to do so.

By passing on less than half of the Reserve Bank's 25 point rate cut, the banks have pocketed one billion dollars.

At the same time analysts expect mortgage defaults to top 100,000 in the next 12 months.

Heritage, the largest building society in Australia, is passing on in full the .25% rate cut. So how on earth can the big banks refuse to?

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Federal Treasurer Wayne Swan has asked much the same question.

"I think Australians will see this as a slap in the face to all of those who are working hard to pay off a mortgage in the middle of a global recession. The banks have an obligation to explain themselves and I think they ought to have a good hard look at themselves."

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Armed with little more than a request, political leaders are forced to follow the financial kings.

So what kind of position are the big banks in? To what extent is the cost of funding from overseas hurting them?

All four of the big banks in Australia are rated in the top 10 banks on the planet. They own 92 per cent of the home loan market. Each bank is backed by a Government guarantee on deposits to safeguard them from the economic crisis.

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The Commonwealth Bank made a profit of $2.5 billion in the six months to December, up $200 million from the previous year. All the big banks are doing better than just about any others in the world.

And the cost of funding from overseas?

All four of the big banks are paying within the range of high and low costs for overseas funding.

Two months ago when the Reserve Bank cut interest rates by 1 per cent, when overseas funding cost more, Westpac passed on the full cut, proudly proclaiming it was "...pleased to support our customers in these difficult economic times."

Now that times are easier for them, and tougher for mortgage holders, it appears Westpac and the big banks are pleasing themselves.