CHOICE membership

Deposit rates - after the RBA decision

Some banks have passed on the RBA’s rate rise to depositors for at call accounts, see Three of big four banks pass on official rate rise to savers

St George is not amongst the list of what I call the “Good Guys”.

In addition to inertia about at call accounts, St George also has not shifted its term deposit rates from what they offered some months ago.

On 17MAY22 it will ramp up its lending rates, see https://www.canstar.com.au/home-loans/banks-respond-cash-rate-increase/

I wonder, does Choice compile a list of which bank passes or doesn’t pass rate rise to their borrowers and depositors? If not, then I suggest that may be something for Choice to consider.

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A bank is not obligated to change rates by the same amount as the RBA - the bank’s rate change could be more than the RBA change or less, or the bank’s rate change could be zero.

So “does or doesn’t pass on” needs to be generalised to “in full”, “in part” (with specified change) or “not at all” or even “in excess” (with specified change).

A bank is also not obligated with the timing of the rate change. So the RBA changes on the first Tuesday of a month, excepting January, but a bank might make a decision only at its own board meeting or according to some other schedule.

(This matters because in an environment of several consecutive changes from the RBA, it could be difficult to match RBA changes to changes by a given bank.)

There are a lot of “banks” in Australia. So you could be making a lot of work for Choice. Unless you are stepping up. :wink:

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There is no relationship between the RBA cash rate and bank deposit rates.

However, there is a link between the RBA cash rate and bank lending rates. The cash rate is what interest banks have to pay other banks to maintain their statutary minimum reserve requirements. If that interest goes up, then the banks have to pay more, and they will very quickly pass that on to borrowers.

Deposit rates may only go up if the bank decides it wants more funds from depositors.

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The theory is competition for deposits and loans will ‘manage’ the banks as their business ebbs and flows. Theory and reality are often disparate though.

It is also not that easy to identify ‘the one for you’.

ING is so far a laggard. Deposit rates have not increased with the RBA but they were at the top of the heap only a few days ago, as well as many months ago, if you played their ‘game’. At 1.35% for at call funds it is still a good comparative deal in these times.

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It isn’t overly important if a bank passes on a shift in RBA official cash rate.

It is more important to know what banks offer the highest net interest rate on monies deposited with them. While knowing who passes on the movement to their customers may be of interest and could trigger a review to seeing is one is still getting the best deal, any movement of interest rates may not be in the best interests of a consumer/depositor. It is possible that making decisions based on those financial institutions that pass on a interest rate may be misguided, as it is possible that a customer will be worse off than shifting their deposits elsewhere. This is why net interest rates are important to know. There are many other websites that offer information on what institutions offer the best interest rates, and the time taken to manage another such website by Choice might not be in the best use of their limited funds.

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PHB you’re spot on. The most important detail is to know who pays the highest net rate.

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I really have no idea what you mean by ‘net interest rate’ and money deposited in a bank account.
Care to explain?

Net interest rate is after costs associated with the deposit are factored in, such as monthly fees etc. It can also can include bonus interest which some institutions pay when a qualifying deposit is made, without without a withdrawn into an account. For term deposits, the timing of interest and its calculation needs to also be considered because compounding effects can affect the advertised base interest rate.

That is how you get money into a bank account. It can be done physically at a bank branch using cash/cheque or electronically through a EFT.

Right, understand what you are getting at now.
Factor in fees and charges on the deposit account, conditions that apply to get the actual headline rate, etc.

‘Net interest rate’ is typically applied with ‘margin’ or ‘spread’ to indicate the difference between interest paid to depositors and interest charged to borrowers. A measure of a banks profit.

With the caveat that a bank’s interest rate margin most certainly is not their profit. Out of that interest rate margin they have to pay for labour, equipment and other materials, electricity, rental/building maintenance, …, as well as provide for loans that ultimately end up in default.

And of course on the other side of the profit ledger, there is profit from other sources e.g. fees and charges, profit on other services provided, …

True, but the fundamental way banks make money is to get money from various sources, pay interest on that, and then lend that money out to those who need money at a higher interest rate.
The difference is the interest rate margin. The greater that difference is, the more money can be made. Profit.

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Or they create it from nothing. This is one of the ways that money is created - with the permission of the federal government. They typically lend ~15 to 20 times more than they have on deposit or have borrowed.

Banks cannot do that in Australia. Maybe in Bananastan.

Banks cannot do that in Australia. They need to maintain minimum capital reserves of at least 10% of depositors funds. Maybe in Pineapplestan.

Not since 1988 do they need to maintain reserves, and since July 1999 it’s replacement called the non-callable deposit requirement (which was set at 1%) is no longer in force.

From the data.gov.au site “Prior to July 1996 the series ‘Exchange settlement balances’ primarily reflected deposits of Australian banks, comprising non-callable deposits and, prior to September 1988, Statutory Reserve Deposits and deposits by savings banks. The Statutory Reserve Deposit requirement on trading banks was removed in 1988 and the non-callable deposit requirement was abolished in July 1999. The Bank commenced paying interest on Exchange settlement balances in July 1996”.

So based on that we are in Pineapplestan.

As to

Yes they do, they now lend against capital…a mortgage or another loan is a an asset to the bank and counts towards capital and so they make a loan and they can and do make a loan against that ‘new’ capital thus making money from nothing. This is partly funded from overseas debt the banks arrange so as to have the money to lend. What is in place now is called a Capital Adequacy Ratio, that is at Tier 1 they currently must have capital assets/capital of at least 8% more than their risk weighted credit exposure (provision for bad debts sort of…loans that might not be repaid). That just means they must have more safe assets (including mortgages as they are secured so not generally a risk weighted asset) than they have risk weighted assets. So we are also in Bananastan.

APRA are the controller of all these requirements, the RBA plays no part in the decision making of adequacy.

Capital explained | APRA

and then how they work out the adequacy

APRA Explains: Risk-weighted assets | APRA

A bit about the debt the banks get themselves into to fund their loans here:

The Nature of Australian Banks’ Offshore Funding | Bulletin – December Quarter 2019 | RBA

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We went through this at some length in this thread. I am not going to re-post all the links there again. Please have a look at them and then get back to us with your rebuttal.

Creating money out of nothing is a myth.
I quite like this explanation.
https://voxeu.org/article/banks-do-not-create-money-out-thin-air#:~:text=Since%20modern%20money%20is%20simply,it%20creates%20a%20new%20loan.

Before we get lost in economic theory and the meaning of the words and whether money is created “out of nothing” let us go back to your original statement.

the fundamental way banks make money is to get money from various sources, pay interest on that, and then lend that money out to those who need money at a higher interest rate.

Are you saying that:

  1. The total of bank lending is less than or equal to the sum of money they get from various sources, such as deposits or loans from other organisations or
  2. They actually lend much more than they obtain from those sources.

If you say (1) then the link you gave and all those I pointed to disagree with you. That link you gave opens with:

In contemporary societies, the great majority of money is created by commercial banks rather than the central bank.

The author does not dispute that they create money but goes on to argue about how that is done, what you call it and the economic theory behind it. I see no point in all that theory. Let us stick to the fundamental question of, do they lend more than they have, which any of our readers can follow.

You seem to be taking position (2) when you say:

Banks cannot do that in Australia. They need to maintain minimum capital reserves of at least 10% of depositors funds. [italics added]

If they hold only 10% then clearly they lend more than they have. If you stand by that then we agree.

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As I noted above they no longer have any requirement to hold any amount of money, 10% or otherwise (which 10% was a statutory reserve held with the RBA).

They must have more total capital than they have at risk capital and the level of this value is set by a formula overseen by APRA. These capital values include loans to borrowers Loans to borrowers are assets and as such form part of capital. So if they make a ‘zero’ percent risk loan this is only counted on the numerator side of the formula. Even if the loan is assessed as a somewhat risk (risk ranges from 0% to 100% generally), the amount that is at risk is added to the denominator (the % of the loan risk of the loan) and the total added to the nominator. Once the level of capital is above the requirement, the Bank can loan even more of that capital until they get close to the cutoff. In reality if they manage risk well, they have an endless supply of capital to loan (creating capital from loan debt). While it isn’t strictly money from nothing, it is so close to that definition that it may be seen in that context.

Yes noted. Australia no longer requires banks to hold a reserve of real money to meet a possible demand of deposit holders wanting to withdraw money.
But the banks to need to maintain a level of liquid assets to meet such a demand, and APRA monitors this based on something I don’t really understand called capital adequacy ratio.
My understanding is a bank needs to maintain something like 10% of tier 1 capital. Sometimes this is adjusted based on conditions, either for a certain bank, or banks in general.
For example, when the pandemic hit, APRA required all the banks to increase their tier 1 capital by using retained earnings. If you were a shareholder in a bank, you may have noticed the big drop in dividends the last two years.

They only need to maintain the % ratio, there is no need to maintain that % as funds. The Tier 1 ratio includes the shareholder capital and any asset, it must be a realizable asset. Tier 2 ratio is basically about what we might call junk bond quality and has a much higher ratio requirement, banks tend not to loan into these much (ahem GFC!!!). For some at risk lending they use a risk range that exceeds 100% eg it may have a risk range value of 120%, meaning the risk is so great that it additionally reduces the value of the calculated Capital Adequacy Ratio by that further 20% rather than just the normally possible 100%.