I was surprised to hear Bill English come out and tell banks to reduce their profitability. This statement is ridiculous – it is like telling people to go out and cut their wages.
However, Bernard Hickey bet me to the punch in criticising this. This quote sums up how I feel:
I actually like that our banks are profitable. The alternative is unprofitable banks that collapse at the slightest breeze
There is one more issue though. The RBNZ feels that banks are not being competitive. [Note: I am not bringing up the deposit guarantee scheme. If the government is not charging an appropriate fee for the guarantee then they are being silly – we shouldn’t attack the bank’s for that.]
Now, if there is a competition issue there could be scope for intervention. But wait a second, Kiwibank and PSIS are offering lower floating rates (5.99% and 5.75% respectively) – why isn’t the existence of this competition driving down prices? If we believe that people are willing to pay a margin on their floating rate if they go with a big bank then we have to ask “do we think Kiwibank and PSIS are being uncompetitive” – as they are setting the floor for interest rates.
I’ll tell you why floating rates are so much higher than near term fixed rates – uncertainty. People are willing to pay a premium on floating as they are uncertain about the degree with which rates will fall in the future, so they value the flexibility. Furthermore, the return on floating rates will be volatile (as they can change at any moment) so banks want to charge a premium – as they are facing uncertainty (people value a certain return above an uncertain return). I don’t see what is unfair here.
If we force the banks to cut rates (with the same cost structure), they will reduce lending FFS. Is that really what we want in the middle of a long-recession?