Banks have pushed up their lending margins, but funding costs have risen: RBA

Australia’s banks have increased the margins they earn on their loans by 25 basis points over the past 12 months adding to the 130-basis-point buffer built up over the previous four years, says the RBA in a submission on the state of the banking sector, post-GFC.

According to the RBA, the increases “reflect efforts by banks to retain their net interest margins in the face of a combination of higher funding costs  relative to the cash rate, a shift in the composition of funding towards higher-cost forms, including equity, and an increase in expected loan losses".

However, as the graph below shows, households have fared better than small businesses when it comes to the increasing cost of borrowing money:

In its submission to the Senate Economics References Committee’s inquiry into the post–GFC banking sector, the RBA highlights that since the onset of the GFC in 2007 “there has been a lift in the whole structure of interest rates in the economy relative to the cash rate”.

“This has reflected higher wholesale credit spreads and increased interest rates on deposits due to increased competition. Higher funding costs for financial intermediaries have led to higher loan rates relative to the cash rate.

“This realignment of funding costs and lending rates, relative to the cash rate, has occurred at various stages over the past five years. While funding costs and lending rates had largely stabilised relative to the cash rate by the end of 2010, over the past year there has been a further increase in both funding costs and lending rates relative to the cash rate,” says the RBA.

However, the central bank says the implementation of new capital and liquidity standards under Basel III global bank rules is “likely to have only a marginal effect on lending rates relative to the cash rate”.

“As stated on a number of occasions, the Reserve Bank Board has taken these developments into account in its setting of the cash rate, to ensure that the lending rates faced by bank customers are consistent with the desired stance of monetary policy,” says the RBA.