Submission to the Inquiry into the Post-Global Financial Crisis Banking Sector Trends in Banks' Funding

The level of the cash rate set by the Reserve Bank is a primary determinant of the level of intermediaries' funding costs and hence the level of lending rates.[9] It is the short-term interest rate benchmark that anchors the broader interest rate structure for the domestic financial system. However, there are other significant influences on intermediaries' funding costs, such as risk premia and competitive pressures, which are not affected by the cash rate. At various points in time, changes in these factors can result in changes in funding costs that are not the result of movements in the cash rate. Changes in the composition of banks' funding have also played an important role. For example, competition for deposit funding, particularly term deposits, has increased considerably over the past couple of years as banks have sought to make greater use of more stable funding sources. This has increased deposit rates relative to the cash rate and contributed to a marked change in the composition of bank funding (Graph 8 and Graph 9).[10]

While deposit rates and yields on bank debt generally declined between mid 2011 and early 2012, the declines have not matched the reduction in the cash rate.[11] Indeed, the cost of new term deposits has increased quite considerably relative to market benchmarks. As a result, there has been an increase in the weighted-average cost of funds for bank relative to the cash rate. This increase in funding costs, relative to the cash rate, is in addition to the increase that occurred between mid 2007 and 2010. Given the interest of banks in stable funding sources, the cost of this funding source is likely to stay elevated relative to the cash rate.

While spreads on new wholesale debt have declined so far this year, banks' funding costs are about 50 basis points higher than they were in mid 2011 relative to the cash rate. In part, this reflects banks gradually rolling over their maturing long-term funding at higher spreads. Term deposit costs relative to benchmark rates are also high relative to history, at both short and long maturities.[12]

Overall, the RBA estimates that the major banks' costs of funding their aggregate loan books has increased by about 140–150 basis points, relative to the cash rate, since mid 2007. The available evidence suggests that, in aggregate, the increase in the regional banks' funding costs since the onset of the financial crisis has been larger than that experienced by the major banks. This reflects the fact that smaller banks have experienced a larger increase in funding costs and have made a larger shift in their funding mix towards deposits.


See Debelle G (2012), ‘Bank Funding’, address to the Australian DCM Summit 2012, Sydney, 22 March. [9]

See Edey M (2010), ‘Competition in the Deposit Market’, speech at the Australian Retail Deposits Conference 2010, Sydney, 19 May. [10]

See Deans C and C Stewart (2012), ‘Banks' Funding Costs and Lending Rates’, RBA Bulletin, March, pp 37–43. [11]

See Reserve Bank of Australia (2012), ‘Domestic Financial Markets’, Statement on Monetary Policy, May, pp 51–53. [12]