Bank shareholders will be popping the champagne corks

25 February 2022

by Chris Leitch, Leader

Bank shareholders will be popping the champagne corks and toasting the Reserve Bank for its decision to raise the Official Cash Rate.

Banks currently have $40 billion in reserves sitting in their accounts at the Reserve Bank on which the Reserve Bank pays them interest at the same rate as the OCR.

Those reserves include all the money people have deposited with them, any wholesale funding, and the proceeds of the government bonds they’ve sold to the Reserve Bank in the past 18 months.

That payment of interest by the Reserve Bank gives them a cool $40 million - $10 million more as a result of OCR increase this week.

That’s on top of the additional profit they’ll make from putting up mortgage rates and rates for business borrowers.

The higher OCR will mean very little increase in costs for the banks because they won’t pass on the full amount of the increase to depositors.

The banks don’t lend out money people have deposited with them, nor money they source through wholesale funding.

Those sums are held as reserves.

Every loan by a bank is money they have created themselves out of thin air, like fairy dust, at the time the borrower draws down their loan.

It is a simple double entry bookkeeping exercise.

Gross bank lending as at December 2021 was around $522 billion, up from $473 billion in December 2019.

The increase of $48 billion has been almost entirely to households - property and personal consumer loans - and is one of drivers causing current inflation.

It should have gone into production, something the Reserve Bank failed to signal.

Increasing the cost of borrowing will simply feed more inflation as businesses pass on their extra borrowing costs through higher prices.

The Reserve Bank’s OCR increase is therefore more to do with benefiting the banks than it is with benefiting borrowers, businesses or the economy.