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The Australian Bankers’ Association (ABA) said banks’ failure to pass on all of the interest rate cuts to customers was aimed at strengthening their “extremely strong” balance sheets against further economic weakness.

ABA chief executive David Bell told Sky News banks had made a commercial decision not to pass on the full amount of the Reserve Bank of Australia’s (RBA) 25 basis points interest rate cut on April 7.

“Banks have to make a commercial decision and they also have to look to the future,” he said.

“If the economy deteriorates, banks have to be prepared for that so they have to make sure their balance sheets are strong.

“Banks currently have extremely strong balance sheets,” he added.

Most of Australia’s major lenders responded to the latest RBA rate cut by passing on a cut of only 10 basis points on standard variable mortgage rates.

National Australia Bank and Bendigo and Adelaide Bank did not pass on any rate cut at all.

The federal government reacted on Sunday by announcing proposed relief for consumers wanting to switch lenders.

If the proposed federal law is passed, bank customers could challenge “unfair” contractual terms including exit fees and penalty fees if their bank refuses to pass on interest rate cuts, Assistant Treasurer Chris Bowen said.

Lenders point to what they claim are higher funding costs as the reason for not passing on the rate cut in full.

“When the RBA raises or lowers its cash rate, it does not necessarily alter the banks’ cost of funding,” Mr Bell said, adding that on average banks source half of their funding from short-term money markets and term debt markets.

The ABA was also responding to recent reports by analysts pointing to what they say are burgeoning margins on mortgages and corporate loans that will boost banking sector profits at the expense of consumers.

Analyst reports by Goldman Sachs JBWere, Bank of America – Merrill Lynch, Credit Suisse, JPMorgan and Fujitsu Consulting showed the banks have profited from re-pricing mortgages, business loans and deposits.

They also say this beneficial funding gap will compensate for the rising cost of offshore wholesale funding.

Goldman Sachs JBWere said Australia’s major banks have expanded the spreads charged on standard variable rate mortgages – the margin between the interest rate charged to borrowers over the RBA’s official cash rate – since the credit crisis began.

Spreads on loans to corporations have swelled by between 200 and 500 basis points since the start of the credit crisis, Goldman’s Ben Koo and Elizabeth Rogers wrote in a note to clients.

JPMorgan and Fujitsu Consulting’s latest joint report on the mortgage industry showed banks’ attempts to stamp out competition by depriving businesses of the full benefits of the RBA’s rate cuts in order to subsidise their own mortgage books.

Mr Bell said the banks had directly rejected figures by Fujitsu Consulting.

“They have said in relation to home lending the margins continue to be squeezed,” he said without addressing the subsidisation issue.