RBA tells in­quiry bank fund­ing costs rose

The Pak Banker - - Company& -

SYD­NEY: Banks' fund­ing costs have risen rel­a­tive to the cash rate mainly be­cause of an in­crease in the cost of funds, the Re­serve Bank of Aus­tralia (RBA) says.

The com­ments came in the RBA's sub­mis­sion to a Se­nate in­quiry into com­pe­ti­tion in the bank­ing sec­tor.

"For the decade or so un­til mid 2007, rel­a­tively sta­ble fi­nan­cial mar­ket con­di­tions meant that spreads on the banks' var­i­ous sources of fund­ing changed lit­tle," the cen­tral bank said in the sub­mis­sion, re­leased on its web­site on Tues­day.

"As a re­sult, move­ments in banks over­all cost of funds tended to fol­low those in the cash rate," the RBA said in its sub­mis­sion.

But from mid-2007, fund­ing costs rose, mainly thanks to big rises in the cost of de­posits and long-term whole­sale bor­row­ing caused by the global fi­nan­cial cri­sis.

"The ef­fect of these changes on banks over­all fund­ing costs has been ac­cen­tu­ated by a shift in banks fund­ing mix to­wards these more ex­pen­sive types of fund­ing," the RBA said. The com­pe­ti­tion in­ten­si­fied around the mid­dle of 2008, the RBA said.

"Over­all, the av­er­age cost of the ma­jor banks new de­posits has risen no­tice­ably rel­a­tive to the cash rate; it is es­ti­mated to be cur­rently only slightly be­low the cash rate, whereas prior to the on­set of the fi­nan­cial cri­sis, de­posit costs were about 150 ba­sis points be­low the cash rate," the cen­tral bank said in the sub­mis­sion. For longer term debt, the RBA said the av­er­age cost to the ma­jor banks was es­ti­mated to have risen by about 100 ba­sis points (one per­cent­age point) rel­a­tive to the mar­ket's ex­pec­ta­tion for the cash rate.

Those higher spreads do not af­fect the banks' cost of fund­ing right away, but only when old debt is re­tired and new debt is is­sued.

"If bond spreads and hedg­ing costs re­main around their cur­rent lev­els, then as ma­tur­ing bonds are rolled over, the av­er­age spread on banks out­stand­ing long-term debt is es­ti­mated to in­crease by a fur­ther 15-20 ba­sis points over the next year," the RBA said.

Long-term debt is about a quar­ter of banks' over­all fund­ing, so that rise alone would trans­late into an in­crease in to­tal fund­ing costs "of around 5 ba­sis points over the next year". In the sub­mis­sion, the RBA said it es­ti­mated the av­er­age cost of the ma­jor banks' fund­ing to be cur­rently "90 to 100 ba­sis points higher rel­a­tive to the cash rate, than it was in mid 2007". -PB News

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