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

The spread between lending rates and the cash rate has increased by about 25 basis points over the past 12 months, which is in addition to the 130 basis points or so increase over the previous four years. 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 (discussed below), a shift in the composition of funding towards higher-cost forms, including equity, and an increase in expected loan losses.^[6] The forthcoming implementation of the Basel capital and liquidity standards is likely to have only a marginal effect on lending rates relative to the cash rate.^[7]

The increases in lending rates have varied across the different types of loans, reflecting factors such as changes in expected losses in light of recent experience and the speed at which loans can be repriced (Graph 7). A combination of these factors has meant that rates charged on small business loans, for instance, have increased the most. Even for similar products, there has been a marked increase in the range of interest rates offered by banks.

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.^[8]

Footnotes

For more detail on the effects of equity funding and expected losses, see Fabbro D and M Hack (2011), ‘The Effects of Funding Costs and Risk on Banks' Lending Rates’, RBA Bulletin, March, pp 35–41. [6]

For estimates, see Littrell C (2011), ‘APRA's Basel III Implementation: Rationale and Impacts’, speech at the APRA Finsia Workshop, Sydney, 23 November. [7]

See Debelle G (2012), ‘Bank Funding’, address to the Australian DCM Summit 2012, Sydney, 22 March. [8]