Yes the banks are bastards — but …

There’s a decidedly Abbott-esque note to yesterday’s announcement by Prime Minister Malcolm Turnbull and his Treasurer Scott Morrison that, henceforth, the big four banks would have to front a parliamentary committee once a year to explain themselves — yet another in a long line of efforts by a party that has received $2.5 million in donations from the big banks since 2010-11 (that we know about) to shield them from a royal commission.

At some stage the penny might drop inside the Liberal Party that the banks are convinced they own it — for nothing else can explain the insouciance with which they failed to pass on this week’s interest rate cut or explain themselves, thereby massively complicating the government’s efforts to protect them.

The royal commission has nothing to do with banks’ cost of capital, their pricing decisions or where they set interest rates, but rather about their at best unethical and often outright evil behaviour toward so many Australians, whose lives have been ruined by bank-employed financial planners, insurers and advisers. But interest rate decisions have a way of focusing minds on the ethics of banking for ordinary Australians.

However, let’s put aside the monstrous behaviour of banks aside and think clearly about the rate cut — and who benefits from the banks’ decision.

So, those of us with home loans will benefit — and would have benefited more if more of the rate cut had been passed on. Around a third of Australian homes are covered by mortgages. But it’s mainly owner-occupier mortgagees who will benefit — investors mostly won’t (it doesn’t worry them because of negative gearing, and besides most have fixed-rate mortgages or interest-only arrangements. The rest of us as taxpayers look after them.)

[Why is the RBA letting inflation slide?]

But there’ll be little economic stimulus via those with mortgages because we know that mortgage holders tend to use savings from falling interest rates to build equity buffers by paying off their home loans faster than they should. The RBA estimates the mortgage pre-payments exceed $230 billion, or nearly two years of payments (now a bit more given the two rate cuts since the last estimate). That is one of the reasons why the impact of the last few rate cuts has been more muffled — we’ve just got on with paying off our mortgages quicker.

Small businesses will also benefit, to the extent the cut is passed through to small business lenders, although there, too, the stimulatory benefits will be limited, but for another reason — interest rates are so low already that if businesses aren’t borrowing now, it’s not because interest rates are stopping them.

But those who benefit from the banks not passing on all of the cut isn’t small either. Even though the media like to focus on families with mortgages, you’re probably aware of the impact of rate cuts on retirees who depend on bank interest from their deposits. Many people on pensions and fixed incomes are among the poorest in the community — even those ostensibly asset-rich who own their homes, and interest rate decisions have a real impact on their lives.

But the beneficiaries of the lack of pass-through don’t stop there. The four big banks account for around 24% of the value of the Australian Stock Exchange, and their $20 billion a year in dividends flow to shareholders, large and small. Those shares are overwhelmingly owned by superannuation funds — large, small, retail, industry and self-managed. In fact, the finance sector (including smaller banks like Bendigo and Macquarie) is the largest destination for super funds, large and small.

Our retirement incomes (current and prospective) thus depend heavily on the sharemarket value of the banks and the flow of dividends from them. If the banks passed the RBA cut on in full to mortgagees, their net interest margins would come under more pressure, profits could fall or start weakening, dividend growth (already facing more pressure than at any time in the past five years), would also weaken, or start turning negative.

The share prices of the banks would weaken, superannuation returns (and income from the lower dividends) and retirement incomes would take a hit — as would your super. Hardest hit would be those investors depending on the banks’ fully franked dividends, especially to self-managed super funds whose investments are dominated by their holdings in the banks.

[ASIC: a reform package by bankers, for bankers]

Whenever we have this contretemps over banks and RBA interest rates, no one bothers to ask the question about whether the greatest benefit lies with mortgage holders (who are reluctant to spend their savings, instead they save them, thus defeating the purpose of the rate cut) or with investors, many of whom will spend much, if not all of that dividend income, because it is their retirement income.

And by the way, there’s actually a pretty potent inquiry into the banks already underway: the Productivity Commission has kicked off an inquiry into superannuation at the instigation of Morrison, and a critical part of that will be the integrated offerings of the banks. A draft report has been issued and there’ll be more consultation. But the banks won’t be happy with the PC’s extensive discussion of “competition in banking” efficiency, benchmarking results, best interest of members and the cost of funds management. And the beauty of the PC report is when the inquiry is finalised, and a report sent to the government, the pressure will be on Turnbull and Morrison — particularly from the Nationals — to deliver on the commission’s recommendations.

The PC won’t deliver the steady drip of revelations and dramatic moments of public hearings that a royal commission would, but its hard-nosed recommendations will be more difficult to ignore or explain away. And the PC will be focused on what is best overall for the economy.