Banks rush to raise interest rates on created money
The obscene rush by the ASB and Kiwibank to raise mortgage rates within minutes of the Reserve Bank’s increase in OCR is nothing but cynical, extreme, profit abuse.
ASB, ANZ and Kiwibank had already raised their rates in mid-September, anticipating a possible move by the Reserve Bank.
In doing so, ASB said that this action “reflects rising wholesale funding costs and a generally growing pricing environment”.
“A generally rising rate environment” is the rhetoric of the banks for “we can get away with raising our rates to make even more profit, so we’re going to do it.”
ANZ’s director of personal banking services, Ben Kelleher, today used a similar excuse, saying that his hike in mortgage rates “balances his commitment to supporting people in their homeownership aspirations” with the increase in l ‘OCR and wholesale bank financing costs.
If the bank was really interested in “supporting people in their home ownership aspirations”, it would have left the interest it charges on loans where it was.
These excuses are the biggest bulldust charge that has ever been put forward to raise prices, especially when their costs have barely budged.
And here’s why.
- Banks don’t lend the money they get through wholesale funding, nor do they lend the money people have deposited with them. These sums are held in reserves. Every loan given by a bank is money that it has created itself out of thin air when the borrower withdraws their loan. This is a simple double-entry accounting exercise.
- The Reserve Bank pays the banks interest on the reserves they hold on deposit with it at the same rate as the OCR. These reserves include all the money people have deposited with them, any wholesale funding, and the proceeds of government bonds that they have sold to them in the past 18 months. Their interest income therefore jumped 25 basis points to 0.5 percent to about $ 36 billion as a result of the increase in OCR.
- Banks still have access to wholesale funding from the Reserve Bank through its loan financing program, at the OCR rate of 0.5%. If they access wholesale funding from other sources, it must be less than 0.5%.
These commercial banks create an average of $ 20 billion in new money each year, and that amount has almost doubled in the past two years.
No wonder KPMG’s Financial Institution Performance Survey found their profits rose 20.69% in the three months leading up to March 2021 to $ 1.64 billion.
No other company in the country has reportedly increased profits by 20 percent in the first three months of this year.
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