Australian and New Zealand Authorities Criticize Banks' Interest Profiteering
UK Considers Windfall Tax
Banks Cornered Raise Deposit Rates
There is growing support for imposing a so-called ‘windfall tax’ on global banks that made huge profits through increasing the interest rate spread between loans and deposits during last year’s base rate hike season. Governments and regulatory authorities around the world have pointed to banks, which sharply raised loan interest rates while slowly increasing deposit rates, as the cause of increased burdens on households and businesses. Banks appear to be reluctantly raising deposit rates just to keep up appearances in response to such criticism.
According to Bloomberg on the 28th (local time), two of Australia’s four major banks offer an annual deposit interest rate of 0.85% on online savings accounts. This is far below Australia’s base rate of 3.35% and the variable mortgage rate of 5%. In the UK, deposit rates for accounts with immediate withdrawal start at 0.55%, much lower than the UK base rate of 4%. The average deposit interest rate in the US is only 0.35%, far below the base rate of 4.5?4.75%. Some banks in Indonesia reportedly have an interest rate spread of 11.99%. The typical loan interest rate is around 10.5%, nearly double the base rate of 5.75%.
As commercial banks worldwide have expanded their net interest margins by taking advantage of central banks’ aggressive tightening, governments, central banks, and regulatory authorities have all raised their voices in criticism. Australian Prime Minister Anthony Albanese recently criticized banks, saying it is "unacceptable," and Finance Minister Jim Chalmers urged consumer groups to investigate banks’ interest rate spreads. Adrian Orr, Governor of the Reserve Bank of New Zealand, also stated, "Banks are raising mortgage rates very quickly while slowly increasing deposit rates to support their profits," adding, "To ease inflationary pressures, it is important to raise deposit rates to encourage savings." This aligns with South Korean President Yoon Suk-yeol’s criticism of the banking sector as a ‘money feast.’
Not only in South Korea but also in Europe, including the UK, voices calling for the recovery of banks’ excess profits have grown louder. Like Spain, there are calls to impose a so-called ‘windfall tax’ to channel banks’ interest rate spreads into the national treasury. Spain already applies a 4.8% windfall tax rate on banks’ interest and fee income.
Faced with the government’s tough stance, banks are rushing to raise deposit rates and lower loan rates. Three of Australia’s four major banks significantly raised deposit rates just two days after the finance minister’s remarks about investigating interest rate spreads. Goldman Sachs in the US raised the deposit rate on its popular Marcus account from 0.5% a year ago to 3.75% currently, while Barclays and Ally Bank also raised deposit rates to 3.6% and 3.4%, respectively.
Hugh Dive, Chief Investment Officer (CIO) of Atlas Fund Management, explained, "During the pandemic, increased savings led to an abundance of cash in banks, reducing the incentive to offer attractive deposit rates." He added, "The recent expansion of banks’ net interest income is due to low non-performing loan ratios," and predicted, "If inflation and falling housing prices accelerate financial pressure on customers, changes will occur."
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