The banks have raised the mortgage rates twice this year - without any prompting from the Reserve Bank. They have blamed the Credit Crisis in U.S. They say that this crisis has increased their cost of funds and hence they have no choice but to pass on the increase in cost of funding to consumers.

Since there has been such an extensive coverage in the media about the U.S credit crisis, the banks probably felt that people will understand if they blamed the credit crisis for their actions.

I am not saying that the banks just invented this excuse. The credit crisis is real. It has led to a substantial increase in cost of funding. The initial consumer and media reaction when they announced the rate rises was one of shock. Shock not at the banks’ actions but shock at the huge impact of the credit crisis.

But then we are no fools…It all slowly started to sink in. Here are some of the events following the mortgage rate increase, that makes me angry:

1. Record profits by Commonwealth Bank.

2. Banks cut interest rates on deposits - on their own - no rate drop was announced by RBA.

3. Banks increase the credit card interest rates - again on their own

4. And here is the biggie - there are predictions that RBA might cut rates early next month. But the banks are saying that they are not sure if they can pass on the rate drop - even if they did, they say that they can only pass on a part of the rate drop. This is an absolute disgrace.

I acknowledge that Government has been putting a lot of pressure on the banks. But the fact is this pressure can really do nothing much. Australia has a de-regulated financial market. And hence Government cannot force the banks.

Government has to address the real problem here. The real problem here is the lack of competition. The real victims of the credit crisis in US are the non-bank lenders. Lending by the non-bank lenders has declined sharply. The banks know this and they are rejoicing. They are not afraid. They know that they are the only choice for consumers.

There are recommendations by Mortgage and Finance Association Of Australia to introduce ‘mortgage bonds’, like the Canadian Government did in 2001. Mortgage Bond program provides investors with the opportunity to invest in a guaranteed fixed income vehicle that features semi-annual interest payments and repayment of principal at maturity.

The bonds are backed by the Government. So basically the mortgages are converted and sold to investors. The financial term for this is securitisation. The main difference is that it is all backed by Government, which increases the demand for investing in these bonds. So you see, if we had a similar system here, it will open a new funding avenue for non-bank lenders. Once they have the funding, the non-bank lenders will re-enter the market and that will force the banks to behave.

Its time for Government to address the core problem here rather than doing some lip service.

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