Better funding environment for major banks than regionals: RBA

The big four banks – Commonwealth Bank, Westpac, NAB and ANZ – have more room to move on mortgage rates then their regional banking rivals, a new paper published by the RBA suggests.

The paper prepared as part of the RBA’s March quarter bulletin highlights a tougher funding environment for regional banks compared with the major banks – though overall funding costs have eased across the sector as interest rates have fallen.

“For the regional banks, the evidence suggests that the overall increase in funding costs since the onset of the global financial crisis has been larger than the increase in funding costs experienced by the major banks,” write Benn Robertson and Anthony Rush in their paper Developments in Banks’ Funding Costs and Lending Rates.

Both work in the RBA's Domestic Markets Department.

“A large portion of this increase has been driven by the substantial shift in the composition of regional banks’ funding liabilities away from securitisation and towards relatively more expensive deposit funding, as well as an increase in the cost of their deposits and wholesale debt funding," they write.

Robertson and Rush also report that new mortgage customers were been able to get greater discounts last year compared with existing borrowers.

“During 2012, the average interest rate on outstanding variable-rate housing loans rose by about 40 basis points relative to the cash rate. This increase is consistent with the overall increase in banks’ funding costs

“By contrast, the average interest rate on new variable-rate housing loans increased by around 35 basis points relative to the cash rate, reflecting a small increase in the average size of discounts offered by banks to new customers, as competition for mortgage lending remained strong throughout the year.”

The paper reports that the absolute cost of issuing both secured and unsecured long-term wholesale debt has fallen over the past year, largely reflecting the decline in benchmark rates.

“In early 2013, spreads on the major banks’ unsecured bonds fell to their lowest level since late 2009.

The paper also reveals that all banks in Australia have increased their reliance on deposits.

However, the regional banks still require around 10% of their funding from securitisation – though down from the more than 25% allocation pre-GFC.

“The increase in the share of funding sourced from deposits over recent years has occurred across all types of banks in Australia.

“This trend has been most pronounced for the regional and other smaller Australian-owned banks, with their share of funding sourced from deposit liabilities doubling since 2007.

“Prior to the global financial crisis, these institutions used securitisation more heavily as a form of funding.