Don’t bother asking the big four banks to be nice.

The big four banks are again being criticized for putting their own interests ahead of those of their customers. The concern this time is that they have responded to the Reserve Bank’s recent rate hikes by raising the rates they charge borrowers higher than the rates they offer to savers or those who lend their money to the banks. By widening the gap between the interest rates they earn and the interest rates they pay, they increase their profits.

Picture: Andrew Dyson

Picture: Andrew Dyson

The reaction of some politicians and media commentators was clear: Essentially, banks must do more to help families, many of whom are facing significant financial pressures. For example, why not pass interest rate increases more slowly to mortgage holders the way banks did to savers?

The big four banks have also been criticized for appearing to raise interest rates faster than they lower them in response to the Reserve Bank changes, or for charging existing customers more than new borrowers they are trying to attract (the so-called “loyalty tax”).

What are we to make of all this? Politicians will get nowhere if they press the big four banks to act against their own interests. We need to be constantly reminded that companies want to maximize their profits, not their customers’ interests. They will, of course, look after their clients’ interests when it suits their profit goal, which hopefully they often do. But management and boards get applause and financial rewards when their profits are higher, not otherwise.

We must also remember that those who oversee our economy say they want the big four banks to be “undoubtedly strong” as they see this as central to the stability of the financial system. While failing banks are clearly a problem, it is a matter of balance. To seek out “undoubtedly strong” banks must mean, to some extent, putting their profits ahead of the interests of their customers. It also favors stable actors and business models over innovation and change.


It should be the goal of public policy to balance the interests of profit-seeking companies with the interests of their customers (and by extension Australians in general). In a market economy, companies must ensure that they face strong competition. Companies will then work in the interest of their customers and the wider economy, as Adam Smith noted with his notion of the “invisible hand”.

With insufficient competition, when companies have market power to set prices – free from serious competition – they will naturally put their profits ahead of the interests of others. Strong competition is the natural ‘regulator’ of a market economy and is essential for its proper functioning.

As studies by the Australian Competition and Consumer Commission have shown, the big four banks have considerable market power. Together, for example, they control about 80 percent of the residential mortgage market. The biggest problem is that in many ways they operate like a mature oligopoly. That said, one of the big four won’t compete fiercely by offering customers better prices, knowing the others will do the same — and all will lose. In the past I have described their behavior as “synchronized swimming”. Don’t bother asking the big four banks to be nice.

Brian Lowry

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