Ok, I understand about driving the rivals from the market. But before I ask another question, does the interest that gets paid on money in a bank account get paid by the bank in question? If so, how does that translate to the bank making money? Unless the big 4 borrow from the same place the smaller places...?
The bank pays the interest on what they effectively "borrow" from you, put it into a central pool of funds which they then lend out at a higher rate. If my pool consists of 0.25% payments to you and my competitor pays 1% I have an advantage in normal times, but not a killer advantage.
In tight credit times it gets far more interesting.
The Big 4 banks in Aus dominate retail banking and thus have the vast majority of these low cost funds sewn up (it's painful to switch banks and not really worth it for most people). That's not such a big issue when there's plenty of interbank credit sloshing around to let the situation function as above where there's a few percentage points difference.
But when the money flow slows and then the advantage becomes pronounced, the Big 4 have a massive advantage as they use this pool of cheap funds to finance their loan books and capital ratios whilst non Big 4 banks have to pay way more than this (LIBOR - the London Interbank Rate surged above 10% during the recent crisis and even then the banks demanded a higher rate of return before releasing cash). That's part of the banks current argument for raising rates - this interchange rate mans their cost of funding has increased and they should recoup that.
Normally I would have no problem with such cost recovery, however in this instance the problems are caused by the very banks who made stupid commercial decisions and now wish to use (abuse) their domestic market power by recouping losses from the average punter.
That's a no no in my books, they should suffer the penalties of their actions, that's what a genuine free market would do.
Also, how are credit unions different here? Wouldn't they still be borrowing money with the same rate as the non-big banks? So why haven't they been driven out of competition?
Credit unions generally have a lower capital ratio and a lower credit rating (the overall AAA type thing you keep hearing about) and they also have a far lower retail base to work with so they don't get access to the 0.25% funds anywhere near as much as the banks do. So when the LIBOR goes through the roof places like the CBA have the advantage because that lending makes up say 25% of their total funding cost whereas for a Credit Union LIBOR borrowings make up to 80% of how they cover their loans.
This is exactly what did RAMS in about 12 months ago, they had to maintain borrowings at LIBOR rates and that just got so expensive they folded and sold out to Westpac for a pittance of their real value in any but bizarre circumstances.
If you're saying government intervening is good here, why do you always harp on about the government needing to keep out of the bank's business?
As soon as you have laws there is no totally free market. And a totally free market is undesirable as there is no control over certain behaviours, including in commerce. Take that Leb who got shot in his Lamborghini. Word has it that a bikie borrowed several hundred K of drug money off him and didn't want to pay it back so he tried to kill him instead and erase the debt that way. If we had no laws then we would return to a feudal might is right system.
What we must have is the most basic framework possible to ensure consistency and certainty in the markets. Don't restrict ideas, don't restrict reward for effort but make sure there are a common set of rules to play by that all players understand up front.
Once you tart changing the rules mid play then that is the absolute no no, things like Rudd's bank guarantee distort the market massively and give an advantage to certain players over others and as we are now seeing those certain players go "thanks for that, I now dominate the market, sucks to be you because I'm now going to use that market power".
And if you think the latest CBA rise was the last of it think again. 0.1% of a rise is the CBA employing Game Theory. They are signalling to the market that this is what they will do, they await the market response and if everyone follows then the market will continue to move upwards to make additional profits because there are no smaller institutions in there fighting competitively to win business.
Remember some time ago when Telstra removed handset subsidies (i.e. you get a free handset with your phone plan)? They were hoping all the other companies would look at that as an opportunity to recover costs for the handsets and make additional profits because those subsidies are frigging expensive. In that instance however the market reacted very differently and said "ah ha! We can attack the dominant player by continuing our subsidies and taking market share away from Telstra and earn extra profits that way". And that came about because the mobile phone market is so much more competitive than the bank sector.
So, the govt should set out the rules, they should not then intervene in a manner that distorts the market otherwise unintended consequences will occur and the exact situation we have now will arise where the medium and longer term result is far more detrimental than the short term solution was beneficial.
It does indeed. Hope I'm not firing too many silly questions at you. 
All good, it gives a decent discussion in this place (we need more of it to counter the banality but not so much of it this place ceases to be fun) and that's a good thing.
SG
P.S. Maths exams rock!
