from Crikey ….. 

Banks dig in over RBA cut 

Canberra correspondent Bernard Keane writes: 

The Commonwealth Bank is holding back 0.17% of the yesterday’s Reserve Bank Recession Buster Closing Down Everything MUST Go Sale interest rate cut. 

"Unfortunately," the Commonwealth declared in a press release, its heart bleeding for its customers, "as a result of a significant increase in all three elements of our cost of funding over recent weeks, we have not been able to pass on the full amount of this latest decrease in interest rates.” 

"Recent weeks" of course have seen the Government’s bank guarantee, as well as the general investor flight to safety, send a flood of deposits into the major banks, as well as coordinated interest rate cuts across the globe. And the Commonwealth Bank finding some loose change to further reduce competition by buying Bankwest. 

Tim Colebatch expressed the forlorn hope that "its rivals will now show us the banks are not a cartel by leaving the Commonwealth stranded, and passing on the full reduction to those for whom it was meant." 

The only evidence that the banks are likely to provide that they’re not a cartel will be in the fact they don’t cut rates by exactly the same figure as the Commonwealth. Expect some 0.62% cuts. 

The refusal of the banks to pass on the full cut is simple gouging. The major banks have been handed two remarkable commercial benefits by the government in "recent weeks" -- a sovereign guarantee for deposits, and virtual permission to embark on a round of consolidation that will sacrifice what little competition there is in the banking oligopoly in the interests of "stability". 

It wasn’t so long ago that there was serious discussion of a windfall tax on resource sector profits. Then-academic and now Treasury adviser Andrew Leigh argued in the AFR in June that a one-off windfall tax on miners would be non-distortionary, being retrospectively levied on 2008-09 profits, and reflect the fact that mining companies were not benefitting from significantly better services or products – merely from a boom in the price of the goods they produced. He also noted that there was recent precedent for the Commonwealth to impose windfall taxes. 

Well, fast forward all of four months and no one’s talking about windfalls of any kind in the mining sector. 

But Leigh’s arguments apply just as well to the major banks. They are not doing anything differently -- just the same old oligopolistic provision of financial services, affording a substantial rent to the banks and their shareholders. But they’ve benefitted significantly from two decisions by government, ones that will substantially strengthen their competitive position for years to come -- for at least three years, for the deposit guarantee, and indefinitely with the reduction in competition. 

So why not a windfall tax on banking profits? At a time when Lindsay Tanner and his officials have spent months searching up hill and down dale -- or at least around the Parliamentary Triangle -- for budget savings, a windfall tax would ensure the major banks partly compensated taxpayers for the largesse handed to them in "recent weeks". 

The Commonwealth’s 2007-08 profit was $4.79b. Westpac’s $3.86b and its new partner St George $1.32b. NAB’s was $4.5b. ANZ $3.3b. Assume a 5% fall in collective profit in 2008-09 courtesy of exposures to the likes of ABC Learning. A 3% windfall tax would yield more than half a billion dollars to the budget bottom line at a time of radically softening fiscal conditions. Each additional percentage point would provide an additional $160m. 

The tax would amount to a redistribution from bank shareholders -- typically middle- and high-income earners -- to taxpayers, enabling it to be directed to further economic stimulus or infrastructure investment. 

Populist? Almost certainly. Punitive? Well, slightly, and punishment is never a sound basis for policy. But it would ensure the major banks did not simply take the benefits of government generosity and distribute them internally via executive payouts and to shareholders. 

Hello to players of the Keane drinking game. 

and ….. 

What's the CBA's game with rates, ABC and Allco? 

Glenn Dyer writes: 

So what's the link between the Reserve Bank rate cut of 0.75%, the Commonwealth Bank's stingy cut of 0.58% and the failure of Allco Finance and the impending collapse of ABC Learning Centres?  

Well, those two companies have combined debts of well over $2 billion and can't meet them; they've been kept alive by their banks extending repayment deadlines. That charity has finally been exhausted.  

The CBA is a major lender to Allco and ABC, and has advanced money to City Pacific and Centro, so they will be looking over their shoulders at the banks and wondering if and when the axe will fall. Centro has until the end of the year to come up with something.  

The CBA has advanced an estimated $200 million to Allco which won't be recovered in full and ABC Learning where the CBA revealed last month that $100 million of ABC Learning Notes had been written down with the cost coming off 2009 earnings. Allco directors pulled the plug last night with this statement to the ASX and ABC is expected to follow suit today after stories appeared in the morning media predicting its demise.  

Now those losses have to be paid for. Was it a coincidence that the day the RBA surprised us again with another larger than expected rate cut, that Allco directors got the tip that any future extensions would be useless; that ABC Learning Centres came to the same conclusion, and the CBA served up a series of silly arguments to justify not handing on the full 0.75% cut?  

The CBA had revealed its less than fulsome rate cut, but attempted to defend it.