Submission to the Inquiry into the Post-Global Financial Crisis Banking Sector Margins

Most of the major banks reported a narrowing in their net interest margins over the first half of their 2012 financial years. Since the onset of the crisis the net interest margin of the major banks has fluctuated between 2¼ and 2½ per cent (Graph 10). Changes in lending rates and funding costs since the end of the major banks' most recent half years are likely to keep margins around this range.

The net interest margin of the regional banks has declined since the onset of the crisis, mainly reflecting the larger increase in funding costs, but has increased for some regional banks over the past year. Overall, since mid 2007, the regional banks' net interest margins have fallen by between 10 and 15 basis points.

While lending rates and funding costs are important determinants of banks' net interest margins, banks' net interest margins are also influenced by a number of other factors, such as the use of derivatives to hedge interest rate risk on assets and liabilities and the size of banks' equity buffers. The contribution of these factors varies from year to year.