Proposed legislation to restrict bank interest rates in Aussie

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The Australian Greens Party has proposed that laws should be made restricting the ability of banks to raise their rates in excess of Reserve Bank of Australia (RBA) rate rises.

Wednesday, November 17th 2010, 5:41PM

This comes two weeks after the Reserve Bank of Australia (RBA) increased the cash rate by 25 basis points to 4.75%, in a move that took the market by surprise. Following this rate rise, all of the four major Australian banks raised their mortgage rates.

CBA was the first major bank to announce an increase, with ANZ, NAB and Westpac following suit shortly.

However, the banks have incurred a heavy backlash from the public, due to raising their rates in excess of the 25 basis point RBA increase. For example, CBA raised its standard variable mortgage rate by 45 basis points.

As a result of the backlash against bank mortgage rate rises, the Australian Greens Party has first of all proposed legislation that would give the Australian Prudential Regulatory Authority (APRA) power to prevent mortgage rate rises that exceed increases in the banks' financing costs.

Ultimately, the party seeks to introduce laws that would prohibit the major banks from raising their rates in excess of RBA cash rate increases.

Datamonitor senior analyst Petter Ingemarsson says although the proposed legislation could provide respite for stressed mortgagors and prove popular with the public, there are several problems with the suggested solution.

He says bank funding costs are difficult to calculate, and have in recent years diverged from the traditional yardstick of the cash rate.

"As the RBA cash rate has become less correlated with bank funding costs, tying bank rates to the indicator rates would be less than optimal," he says.

Ingemarsson also points out that the Australian banking system has proved remarkably resilient in the face of the global financial crisis and excessively restrictive legislation could weaken the financial system.

"However, it remains clear that banks need to carefully evaluate the political ramifications of their pricing," he says.

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