There is no doubt that the recent aggressive interest rate cuts by the Reserve Bank of New Zealand (RBNZ) are positive. However, they carry less punch if banks keep some of the lower cost of funding for themselves, without passing the full benefit on to customers.

Banks in this country have a key role to play if New Zealand is to recover from the current recession but they don’t appear to be “playing ball” when it comes to the margins they are currently enjoying.

The table below shows the extent of the mortgage margin for the major banks over current bank bill rates. The average floating mortgage rate margin over bank bills for New Zealand banks is currently 3.40%. It used to be a rule of thumb that the major banks had a margin of about 1.5% over bank bills for floating rate mortgages.

Of course these are very unusual times but does the current margin warrant being so high? The 3.40% margin is not only 1.90% above the usual margin but is also 0.79% above the margin the same banks currently enjoy in Australia. It is particularly galling to see the Aussie banks fall over themselves to pass on the full 1.0% cut in interest rates announced by the Reserve Bank of Australia (RBA) this week, but the same banks appear to be reluctant to pass on the full RBNZ interest cuts in this country.

Floating Rate Mortgage Margins on both sides of the Tasman

                                                             New Zealand                        Australia
Official Cash rate (OCR)                          3.50%                               3.25%
Bank bill rate (90 days)                           3.53%                               3.22%

Floating mortgage rates
ANZ                                                            6.95%                               5.91%
ASB/CBA                                                   6.90%                               5.74%
BNZ/NAB                                                  6.99%                               5.74%
Westpac                                                     6.89%                               5.91%
Major bank average                                 6.93%                               5.83%

Margin over bank bills                             3.40%                              2.61%

This excess margin is a real transfer of wealth from New Zealanders to the banks. Applying the excess margin of 1.9% to the $163.3 billion of household borrowings (at 31/12/08) equates to $3.1 billion or 2% of New Zealand’s GDP. Even moving the margin down to Australian levels equates to $1.3 billion, a very significant sum.

Margins on some other bank products are even higher. While the National Government’s small business initiatives are potentially very helpful they are being blunted by the extremely high interest rates that many of these same small businesses are still paying despite the massive recent falls in the OCR by the RBNZ.

There is no doubt that the Government through the RBNZ need to become more actively involved. While an individual bank’s cost of funding would not have to be publicly disclosed, the RBNZ has the ability to scrutinise bank margins and then publicly attest that they are fair or are being set too high. New Zealand borrowers deserve nothing less than this.

Last 5 posts by Anthony Quirk

• Keep investments selective - January 22nd, 2009
• Caution is the word - October 16th, 2008
• CDO write-offs have local ramifications - July 29th, 2008
• Caution the key to global outlook - July 8th, 2008