WHO'S running the country? The Federal Government and the Reserve Bank, which sets monetary policy, or the banks, which this week ensured that little or none of the Reserve Bank's interest rate cut will reach its intended beneficiaries?

That's how millions of home owners might see it after most banks passed on just 10 points of the Reserve's 25-point cut in cash rates, while the National Australia Bank gave its customers nothing, instead seizing the opportunity to rebuild profit margins compressed by the global financial crisis.

Opposition Leader Malcolm Turnbull went on the attack yesterday, saying monetary policy doesn't work when the banks don't pass on rate cuts. "Rate cuts are only effective in stimulating the economy if they are passed on by banks," he said. "The banks are doing very, very well at the moment."

Treasurer Wayne Swan was apologetic, conceding the banks' conduct "does blunt the effectiveness of monetary policy". But he argued that previously nearly all the cuts had been passed on, and ruled out punishing the banks, leaving it to "the court of public opinion" to judge them.

One suspects it will. Two weeks ago, new NAB chief executive Cameron Clyne warned: "If the banks do not act to re-earn the respect of the community, we will end up in a more precarious position." He might prove himself right.

But the reality is more complex than the court of public opinion might realise. The banks get very little of their funds by borrowing from the Reserve Bank. A cut (or rise) in its overnight interest rate does little to change their costs.

Why it matters is that the banks use the cash rate as the base on which other interest rates are fixed, with different margins for their risk levels, maturities, security - and the extent of market competition.

NAB argues that roughly half its funding comes from wholesale financial markets, where the spreads they pay have risen sharply as the crisis has made lenders demand higher premiums for lending their money.