RBA tells inquiry bank funding costs rose
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