Does Canberra really want the big banks to break rank and compete on price? If so, the outcry over last week’s decision by National Australia Bank to not pass on the full rate cut was a gross overreaction.

NAB had already gone out on a limb and pulled its mortgage rates back to the lowest in the market. The fulminating in Canberra though, on both sides of the House, can only be a disincentive for the Big Four to act outside the pack when it comes to rate cut decisions in future.

NAB’s peers – the CBA, Westpac and ANZ – all lowered rates in tandem with the Reserve Bank’s 25 basis point cut on Melbourne Cup Day last week. NAB however, only lowered its standard variable rate by 20 points.

NAB is still the cheapest even after the 20 point decision. Its standard variable rate, at 7.47 per cent, is lower than ANZ’s 7.55 per cent, the Commonwealth’s 7.56 and Westpac’s 7.61 per cent.

The move highlighted that prickly conundrum that what is good for a company’s shareholders is often bad for its customers.

More importantly, the savage reaction to what was only a five basis point differential might have scared big bank management from making solo initiatives in future. And that has to be bad for customers.

Here was the action in Parliament:

“ I refer the Acting Prime Minister to his statement yesterday that the decision by the National Australia Bank not to pass on the full interest rate cut was ” a kick in the guts to working families,” railed Joe Hockey.

“It’s a greedy decision from the NAB.

“Did the Acting Prime Minister convey these views to Dr Ken Henry, who along with being on the personal staff of the Prime Minister, is also on the board of the NAB?

Wayne Swan replied: “The decision by the NAB not to pass on the Reserve Bank rate cut in full was a greedy decision. I conveyed my view directly to the chief executive, Mr Cameron Clyne.”

Over-the-top reaction

A few points here: firstly, it would be out of character for a bank not to act greedily. Secondly, the kicking meted out to Cameron Clyne – especially in view of the small five point difference in rate moves – was over the top.

NAB had to fund the large increase in loans it was writing and Clyne only had one lever to slow down the loan growth. He pulled it, and quite gently at that.

On Valentine’s Day, in a bold campaign to wrest market share away from his rivals, NAB had launched its “Break-up” campaign – accompanied by out of cycle rate cuts. It openly criticised the other banks and even eliminated some unpopular bank fees.

The campaign was a big success and won NAB large market share gains – and plenty of the positive coverage from broking analyst as well. But it came at a cost: a 12 point fall in net interest margins – while its peers kept their NIMs steady during last week’s earnings revelations – which was exacerbated by lower fee income as well.

More critically though, as its market share went through the roof, the bank had to obtain more funding for its loans (typically, deposits fund two-thirds of a bank’s lending book with the other third coming from the bond market).

It made sense for Cameron Clyne then to rein in the spiralling loan growth. He needed to fund it. And a 20 point cut, instead of 25 … let’s face it, it’s not worth walking to another bank for that.