Saturday, November 6, 2010

Rates-defiant CBA boss Ralph Norris takes swing at populism

Sir Ralph has come out swinging to defend CBA’s decision to follow the RBA’s Melbourne Cup Day 0.25% rate hike with a 0.45% rate hike of their own.  Not exactly surprising given that they’ve been banging on about their cost of funds rising 2bp every month, but the hostility to the reaction has certainly been surprising.  The other lenders all appear to be ducking for cover, letting the CBA wear all the flak, as normally the majors would have all announced their rate move by the Friday following the RBA meeting.

Ralph’s position is covered in the Oz here.  He also gets some help from former CBA head-honcho and current Future Fund chairman David Murray, who went on to make the following observation:

As to the suggestion that major bank profits - about $22 billion for the 2010 financial year - were too big, the Future Fund chairman said the banks needed to make a 15 per cent return on equity to fund the expansion of the economy.

One of the things I’ve never been able to figure out about banking is why they need to make a 15% post-tax ROE (or in the good old days, 20% plus) when the risk free rate was 5% or 6% (and that’s pre-tax).  I’ve pondered this before (see Keynes Mark II and Banks’ ROE), and I’d have to say that Murray’s comments don’t really shed much light in the matter.

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