Risk margins seem high to Treasury
Treasury Secretary Ken Henry yesterday highlighted the elevated risk-margin component of banks' profit margins and suggested that this was one driver of the rise in interest margins over recent years.Henry devoted a section of his Australian Banking & Finance conference speech to a short essay on bank margins."The net interest margin needs to be sufficient to absorb bank operational costs and bad debt expenses over the course of an economic cycle, and then to provide a return to bank shareholders on their investment. "Thus, the net interest margin will be affected by perceptions of default risk, among other things. "But it is doubtful that a rising probability of asset impairment explains the recent increase in the net interest margin. "Asset impairment has probably been lower than would have been expected a couple of years ago."Henry pointed out that net interest margins for the second-tier banks have mostly fallen since the onset of the crisis, and this was consistent with higher funding costs and the lower credit risks from the household lending that accounts for the bulk of smaller banks' business."Further small reductions in net interest margins over time are likely," Henry said, "bearing in mind the importance of ensuring that the industry does not become exposed to the sorts of stability issues that affected many countries during the recent crisis."