RBA: Funding costs ‘little changed’ since mid-2016

Banks’ funding costs have remained quite stable since the middle of last year, according to a Reserve Bank economist.

A series of banks have recently upped their interest rates, with increases from AMP, CBA, ANZ, NAB, Homeloans, Bendigo Bank, ING DIRECT, St.George and Westpac ranging from seven to 117 basis points.

Some of the banks have pointed to increased funding costs as a driving factor behind the changes.

In her research article 'Developments in banks’ funding costs and lending rates' in the Reserve Bank’s bulletin for the March quarter of 2017, Belinda Cheung of the Domestic Markets Department wrote that overall banks’ funding costs have remained relatively stable since last year.

Providing some background information on how funding costs impact banks’ pricing of loans, Ms Cheung explained: “The rates that banks set on their loans to households and businesses are determined in part by the cost of banks’ funding.

“Banks also take into account risk premia, such as that for credit risk associated with loans, and the liquidity risk involved in funding long-term assets with short-term liabilities. Banks’ growth strategies, competition and the desired return to equity holders also affect their lending rates.”

She elaborated that over the past year, banks’ funding costs have declined “in absolute terms”, although have risen relative to the cash rate.

“Deposit pricing has been a major driver of recent changes in funding costs, reflecting increased competition for certain deposits,” she said.

However, Ms Cheung said that in aggregate, debt funding costs for the major banks are estimated to have fallen by approximately 35 basis points over the course of 2016, which in part reflects a reduction in the cash rate of 25 basis points in May and again in August.

“The spread between the major banks’ funding costs and the cash rate is estimated to have risen by around 13 basis points over the past year (from around 15 basis points to just under 30 basis points,” she said.

“The increase in the spread between banks’ funding costs and the cash rate occurred in mid-2016; funding costs have been little changed since then.”

In terms of wholesale funding, Ms Cheung explained that changes in the cost and composition of wholesale funding had “little effect” on the major banks’ cost of funding, relative to the cash rate over the past year.

“While there was a slight shift in domestic wholesale funding from short-term debt to long-term debt, and an overall lengthening in the term of banks’ issuance, this had only a small effect on funding costs,” she concluded.

[Related: Analysis: APRA action and bank rate hikes]

promoted stories

Francesca Krakue

More from this blogger

Latest News

Recommended for You