Offshore funding pressures ease but banks now more reliant on customer deposits for mortgage lending: RBA

While it has become cheaper for banks to raise wholesale funding from offshore investors, a desire to seek "more stable funding sources" has caused customer deposits to increase to nearly 50% of banks' funding base, according to the RBA’s September Financial Stability Review.

The review says banks' use of offshore long-term debt has been broadly unchanged since 2007, accounting for a quarter of all liabilities, while there has been an increase in the use of deposits "across all types of banks in Australia, although it has been most pronounced for the regional and other smaller Australian-owned banks, which had previously used securitisation more heavily".

In terms of offshore funding, the RBA notes pressures in wholesale funding markets have eased since late last year, “allowing the large banks to maintain good access to international bond markets during the past six months”.

“The ongoing difficulties in Europe have been contributing to volatile funding conditions for Australian banks, but in recent quarters wholesale funding pressures have eased from the levels of late last year.

“Offshore investors have focused on the relatively strong position of the Australian banks compared with those in some other countries. The banks have therefore been able to take advantage of periods of more favourable market conditions to issue opportunistically,” says the RBA.


Australian banks have issued around $50 billion of bonds in the past six months, mostly in unsecured form, says the RBA.

“Banks’ bond spreads have narrowed, and are now comparable to levels in mid-2011, prior to the escalation of the euro area debt problems. This has enabled the banks to issue a larger share of their bonds in unsecured form than they did at the beginning of the year when tensions in global funding markets were high.

“Even so, banks have reduced their relative use of wholesale funding further as growth in deposits has continued to outpace growth in credit."

The report also shows that banks have little exposure to the more volatile eurozone with just 1.6% of their assets based in this market, but says they remain exposed to swings in global financial market sentiment associated with the problems in Europe.

However, according to the RBA, Australian banks should be more resilient to such episodes, given the improvements they have made to their funding, liquidity and capital positions over recent years.

“Around half of the banks’ funding now comes from customer deposits, which is a broadly similar share to a number of other comparable countries’ banking systems."

Overall, the RBA says the Australian banking system has remained in a “relatively strong position”.

Following the GFC, the major banks blamed rising offshore funding costs for interest rate increases outside of the RBA cycle.

But recently the focus has shifted to the rising cost and battle among banks for customer deposits.

ANZ has stopped providing commentary on its independent interest rate decisions, but in July ANZ chief executive Australia Philip Chronican noted that competition in the deposit space was benefiting customers but “also continuing to put pressure on margins”.

Chronican also remarked that offshore funding markets had stabilised “somewhat” but added that the bank continued to “monitor events closely”.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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