So we are enduring another round of interest rate rises by the commercial banks. ASB was first to move in the latest round, with others following.

The banks have repeatedly cited tight credit conditions, with higher wholesale borrowing rates over the last six months. But consider these points:

• The wholesale bank bill reference rate has fallen around 0.55% since April 2009, according to interest.co.nz. 
• Term deposit rates on most term-lengths have not risen nearly as much as mortgage rates over the last six months.

This last point is perhaps the most interesting, as it compares apples with apples. We do note that household deposits are not directly used to fund all of the mortgages in New Zealand, but they do account for more than 50% of all household claims (i.e. housing and consumer loans) as of August 2009. They allow us to compare what the market demands for investment (term deposit rates) with what the banks are offering borrowers. We can thus compare the increase in average interest rates for a two-year term deposit (i.e when the banks borrow) and a two-year mortgage (i.e. when the banks lend), or a five-year term deposit, and a five-year mortgage. The figure below shows the changes in interest rates on term deposits and mortgages over the last six months.

Banks have increased rates on term deposits far more on six month terms than they have on mortgages, which is good news for both borrowers and lenders. Unfortunately, that’s where the good news ends. On all terms from two years and up, the average change in interest rates since April has meant banks are widening the gap between what they earn from borrowers and what they pay to investors. For instance, on the bench-mark two-year term, mortgage rates have jumped from an average of around 6.25 percent in April, to about 6.90 percent in October, a rise of 0.65 percent. Yet in that same period, two-year term deposit rates have nudged up from around 4.90 percent to 5.10 percent, or just 0.20 percent.

The pattern is the same for three, four and five year terms, albeit at more modest levels.

What this means is that as we look out over the medium-term horizon, what banks are really doing is widening their margins, as the following figure shows.

The margin between term deposit and mortgage rates for a six-month term is an average of just over 1.00 percent. However, this gap widens over each term length out to four years, where it reaches almost 2.40 percent. It then moderates to around 2.10 percent, which is still almost double the margin on a six-month term.

In the last few months of challenging economic times, many, particularly in the media, have called on banks to “share the pain”. In a cold, hard world, one could argue that banks, like all real businesses, have as their aim maximum returns for shareholders. While it may be a nice touch for banks to show compassion by taking it a little easier on borrowers, it is certainly not an obligation.

But what makes the situation different is that one could argue that, given the government’s retail deposit guarantee scheme, the banks participating in that scheme (all the major ones) “owe us”.

We are shareholders in the government, as tax-payers, and it is our money securing the future of those banks through the economic storm. One could therefore say that as we have come to the banks’ aid, the very least they can be doing is rewarding that by setting aside profit maximization at least for the duration of the scheme, which has been extended to 31 December 2011.

Whatever our opinions on that debate, one thing banks should not be doing is trying to pull the wool over our eyes. Yes, international funding rates have risen (not helped by the recent Australian rate moves). But banks would do well to provide much stronger evidence that they are, indeed, not bolstering margins through this downturn.