RBA welcomes banks' reduction in reliance on off-shore funding

Banks are tightening up their balance sheets by reducing their exposure to off-shore wholesale funding sources, Guy Debelle, the RBA’s assistant governor of financial markets, has told investors in Sydney.

Speaking at a conference on banking risk, Debelle says the reduced reliance on off-shore wholesale funding comes at the same time as banks are repaying their foreign liabilities.

According to Debelle, the asset quality of a bank is the primary determinant of its financial strength.

“While the funding structure of a financial institution warrants close scrutiny, an investor in that institution should pay the greatest scrutiny to the asset side of the balance sheet,” Debelle says.

Besides noting a significant drop in the share of short-term wholesale funding and a corresponding rise in long-term wholesale funding, Debelle says a “noteworthy development” that has escaped attention is that “banks have raised less of this wholesale funding from offshore than has matured over the three of the past four quarters”.

“That is, in net terms, the banks have been repaying their foreign liabilities,” he says.

In May, rating agency Moody’s downgraded the credit ratings of Australia's big four bank to Aa2 due to concerns about their reliance on wholesale funding.

In the past Australia’s big banks have turned to offshore wholesale lenders to fund 40% of their lending books.

However, they are expected to reduce their offshore borrowings by up to a third over the next two years from about $US150 billion annually to around $US100 billion, according to a report in SMH.

Debelle says Australian banks' use of offshore funding sources was particularly visible through 2009 but is now a much smaller share of the global market “given they are raising relatively less and banks in the rest of the world are raising relatively more”.

“This is likely to remain the case for the foreseeable future,” he says.