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rob carrick

Even if there's a business case for the banks not lowering their prime rate, the decision is an ethical fail.

Don't be distracted by the fixed-rate mortgage cuts just announced by some banks – that's just a smokescreen to cover their unwillingness to move on the more influential prime rate, which guides not just variable-rate mortgages but also lines of credit and floating rate loans.

Peter Noonan's story helps show us why. Mr. Noonan is a 56-year-old retired teacher in Toronto who always played it safe with his mortgages by going with five-year fixed rates. Last October, he went variable as he entered the home stretch in getting his mortgage paid off. For about six hours last week, he looked like a genius.

After the Bank of Canada announced a surprising reduction of 0.25 of a percentage point in its benchmark overnight rate last Wednesday, there was wide expectation that lenders would lower their prime rate by the same amount. By day's end, however, it became clear the banks were not going to immediately lower their prime.

"In the past, I always went fixed rate with my mortgage and regretted my decision when rates dropped," Mr. Noonan said in an interview. "Last October, I decided I'll go variable rate, take the risk that rates will go up and, at the same time, benefit if rates go down. But rates have gone down – at least the overnight rate has – and I'm not seeing the advantage of the variable rate."

Mr. Noonan's reaction? "On a scale of one to 10, with one being nonplussed and 10 being outright fury, it would be a 10." He also signed an e-mail sent to me last week as Peter 'Fists Clenched' Noonan.

The Bank of Canada dropped its overnight rate last week to add some stimulus to an economy that is weakening as a result of falling oil prices. But in not making a matching cut in their prime rate, banks have prevented lower rates from filtering down to families with balances on their credit lines, with floating-rate loans and with variable-rate mortgages. As for those slight cuts in five-year fixed mortgages, they're an overdue reaction to events in the bond market and separate from the prime rate.

There's talk now that the banks' non-compliance on prime has made it more likely the Bank of Canada will cut rates again soon. All lenders are equally guilty of blowing off the Bank of Canada, but the big banks are the worst offenders because they set the trend in the financial sector. If the banks are resisting, others will, too.

The banks don't always move in step with the central bank, but they do in the vast majority of cases. The relationship between the overnight and prime rates is so tight that mortgage brokers were talking up the benefits of variable-rate mortgages within hours of the Bank of Canada move last week. They expected the prime to move down to 2.75 per cent from 3 per cent, just as Mr. Noonan did.

The banks have written loopholes into lending contracts, so they're protected from customers angry about not getting their prime rate cut. But the truth is that for borrowers such as Mr. Noonan, the banks reneged on a deal. Variable-rate mortgages are supposed to go down when the Bank of Canada's overnight rate declines, and up when the bank decides to reduce the amount of stimulus in the economy.

Mr. Noonan believes the banks wouldn't hesitate for a moment to immediately jack up their prime rate if the Bank of Canada raised its overnight rate. We all suspect he's right, but at least two of the big banks did something last week that all but proves it. While resisting a prime cut, they reduced the interest rate on their very popular investment savings accounts to 1 per cent from 1.25 per cent.

There's also a corporate social responsibility side to cutting prime. Encouraged by the banks, Canadians have been profligate borrowers in recent years. A lower prime might have promoted more borrowing, but it would have more than compensated by easing the borrowing costs of current debtors.

The reasons why the banks didn't cut their prime rate were well covered inthis article by my colleague Scott Barlow. A quick summary: Lending profitability has suffered due to recent conditions in financial markets and banks can address this by not reducing prime.

Shareholders may applaud this reasoning and, we should remember, a lot of us own bank shares either directly or through our fund investments and pension plans. But putting shareholders so clearly ahead of customers was an ethical fail. It tells customers they're just meat to feed the shareholders, and that fine print is more important than integrity. Yes, borrowers, the interest rate on variable-rate mortgages and lines of credit does vary. But only when the banks feel like it.

Mr. Noonan has his own interpretation of why the banks aren't cutting prime. "Plain and simple – greed," he said. "How else do you explain it?"