The banks have been benefiting from higher interest rates with Westpac and NAB recently reporting big jumps in profit. And when the reserve bank again raised rates on Melbourne Cup Day, the big lenders passed-on the increased costs to their customers. But as Alan Kohler explains, the banks have also been benefitting in another way - they're earning more interest from their deposits with the reserve bank.
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TVTranscript
00:00 You probably think that when the Reserve Bank lifted interest rates last week, it actually
00:05 set them, that it told the banks what to charge.
00:09 But that's not quite true.
00:11 What it did at 2.30 on Melbourne Cup Day was to announce, without the details, that it
00:16 would charge the banks an extra 0.25% interest when it lends to them overnight, and it would
00:21 pay the banks an extra 0.25% interest on their deposits with the Reserve Bank, which are
00:28 called exchange settlement balances.
00:31 And that's basically it.
00:33 The RBA used to make money from that deal, but a big change happened during the pandemic.
00:38 The deposits that the banks hold at the RBA, in green, have blown out from around $25 billion
00:43 before COVID to $362.5 billion now.
00:49 An older chart shows it a bit more clearly, and also what's happened to the amounts that
00:53 the banks borrow from the RBA, which are called cash market transactions.
00:58 The reason those two lines flipped in 2020 was that the Reserve Bank bought a whole lot
01:02 of stuff from the banks and gave them cash in return so they could lend to businesses
01:06 and households and keep the economy going.
01:09 But the economy turned out to be okay, and they didn't need all the cash, so they deposited
01:14 most of it back with the Reserve Bank, where it earns interest at the cash rate minus 0.1%,
01:21 and they don't need to borrow overnight anymore.
01:24 Last Tuesday, the interest on those exchange settlement deposits went from 4%, or $14.5
01:29 billion, to 4.25%, or $15.4 billion, nearly a billion dollars more.
01:36 Meanwhile, the extra money the Reserve Bank makes from lending to the banks has evaporated.
01:41 So that rate hike means that not only do we pay more to the banks for our mortgages, but
01:46 the Reserve Bank that we own also forks out an extra billion dollars to them as well.
01:51 It goes straight to their bottom line.
01:52 [ Silence ]