RBA says bank funding costs falling but by less than rate cuts

The Reserve Bank has poured cold water on claims by the major banks that their overall funding costs are increasing.

“Our estimate is that the absolute level of banks' funding costs fell from mid-2011 to February 2012, but by less than the reduction in the cash rate,” said RBA assistant governor Guy Debelle in a speech in Sydney today.

He acknowledged that there were “particularly pronounced increases in the cost of term deposits and long-term wholesale debt relative to the cash rate as financial market conditions deteriorated in late 2011”.

But he said that while the relative cost of new long-term wholesale funds was currently higher than that of maturing funds, “this has had only a moderate effect on the major banks' average bond funding costs relative to the cash rate to date”. 

“This reflects the fact that it takes at least 3 to 4 years for the major banks' existing stock of bond funding to be rolled over,” he said.

In addition, he presented a graph showing current wholesale funding costs are below at the height of the GFC.

Debelle said its estimates of banks’ funding costs are based on a “wide range of sources” including “data reported by financial institutions to APRA and banks' regular profit statements to the market to track the composition of funding”.

“We monitor the prices offered on various forms of deposit accounts, and maintain a comprehensive database of wholesale funding, which is updated issue by issue.

“We supplement all of this with extensive consultations with financial institutions, big and small,” he said.

However, he said there remained “a degree of imprecision” around RBA estimates of bank funding adding that its estimates “are for the system as a whole, not for any particular financial institution”. 

Debelle did acknowledge that  while cost of funding is the most important factor that influences the lending rates banks set, “there are a number of other factors that affect pricing including: the credit risk associated with the various types of loans, the liquidity risk involved in funding long-term assets with short-term liabilities, and choices about growth strategies in different markets”. 

Following its independent decision to leave its standard variable mortgage rate on hold at 7.36% in March, ANZ Australia CEO Philip Chronican said funding costs remained in an “upward trend” that was “likely to continue as new funding is still coming on at a wider spread to the cash rate than the funding it is replacing”. 

Also in March Westpac CEO Gail Kelly warned borrowers to expect more frequent increases in interest rates because of more expensive funding costs.