Bank boss says the only way is up

The National Australia Bank has warned that interest rates could keep climbing for another 18 months despite Treasurer Wayne Swan’s claim that his banking reforms will drive them down.

Giving evidence to a Senate inquiry into banking competition yesterday, NAB chief executive Cameron Clyne said his bank — which offers the lowest mortgage rates of the big four banks — would be forced to replace cheaper wholesale cash with more expensive money well into 2012.

He said the bank would even- tually be able to cut rates by more than any move in official interest rates set by the Reserve Bank.

But the immediate future was bleak because money was up to 10 times more expensive than it was before the global financial crisis.

“The average cost of our funding is rising because we’re replacing cheap funding with more expensive funding, ” he said.

Mr Clyne was the first of the big bank bosses to face the inquiry, which started a day after Mr Swan unveiled his reform package that includes a ban on mortgage exit fees, a “mortgage fact sheet” for new customers and $4 billion to be pumped into the residential mortgage-backed securities market.

Mr Clyne’s comments came as Reserve Bank governor Glenn Stevens urged Canberra to be wary of exposing taxpayers to unwanted risks through its banking plan.

Mr Stevens told the inquiry that competition was more fierce today than 15 years ago. Consumers had more choice and banks were under more competitive pressure.

But as the Government strives to support a “fifth pillar” to compete against the big banks, Mr Stevens said it needed to be wary of unintended consequences of helping smaller lenders, citing examples from the US sub-prime crisis.

“A number of proposals that one sees extend guarantees to this or that, or you know, help this market or that in some way, ” Mr Stevens said.

“Those really amount to taxpayers taking some more risk.”

This could be worthwhile, he said, but such moves needed to be treated with “great care”.

Mr Swan maintained his plan would help small lenders in particular provide extra competition, and rejected suggestions the ban on exit fees would end up with banks increasing other fees.

“If they do that and they are not related to costs and if they are just penalising their customers, they can be prosecuted, ” he said.