The empire struck back, well sort of. Two leading members of the business commentariat this morning defended the decision by the Commonwealth Bank to increase variable mortgage rates by 10 basis points earlier this week.

Fairfax commentator, Elizabeth Knight, agreed with the banks line, noting:

The banks have long been pushing their case that the rate at which they borrow funds no longer closely mirrors the cash rate set by the Reserve Bank. Thus when it cuts rates the Big Four — the Commonwealth, Westpac, ANZ and NAB — don’t have a business case for passing it all on. They can’t afford to.

Stephen Bartholomeusz was even more strident in his defense, in an article entitled “Pilloried for Playing Fair“, Bartho claimed:

Bank funding costs are now moving quite differently to the cash rate, which means everyone will have to get used to the new reality: that home loan and business loan rate movements aren’t going to be tied as directly to the RBA’s official rates, in the period ahead, as they have been in the past. That’s not a matter of the banks being selfish, or evidence of profiteering; it simply reflects the new post-crisis reality of their funding environment.

There is certainly an element of truth in those arguments — the cost of wholesale funding has increased due to the significant debt loads being assumed by governments to pay for fiscal spending. Nevertheless, while the banks’ costs have risen (and in the Commonwealth’s defence, it did have lower prevailing mortgage rates that the other majors), the big four have more than made up for the compressed margins in other areas.

Former Liberal leader and economist, John Hewson, put it best in the Financial Review this morning when he noted:

[The banks] are exploiting their privileged position in the financial crisis, some of which is of their own making, to the narrow benefit of a few key executives, who were already overpaid, and their shareholders, by ripping back market share, restricting credit, overcharging for their services, underpaying their depositors, and investing their considerable and growing ‘excess’ cash in either supporting other banks, buying government securities, or acquiring foreign assets, mostly Asian.

The fact remains in an economic downturn most businesses will face margin compression — consumer spending falls, which leads to lower revenue and likely lower earnings. Banks are seeking to avoid this scenario by using their market power to overcome macroeconomic reality. They are able to do this because the large banks operate in a regulated oligopoly with minimal real competition.

Banks have no inalienable right to maintain margins in a recession — nor are they legally allowed to charge exception fees which amount to a penalty under the common law. However, it seems that when it comes to maintaining the profitability of the big four banks, contract or competition laws don’t really seem to apply.

While drastic (especially coming from a former leader of the Liberal party), perhaps Hewson’s solution is most apt, that maybe the banks “should be re-regulated to ensure they meet their moral and community service obligations. At the very least, it is now imperative that the government initiate a truly independent, judicial inquiry into the activities of our banks.”