Banks funding costs move interest rates out of sync


Reserve Bank of Australia (RBA) governor Glenn Stevens says the higher long-term funding costs faced by Australia’s big commercial banks means changes to their mortgage interest rates may be out of sync with movements in official rates.

“There isn’t any law that says banks can only adjust interest rates when we do,” Mr Stevens told a House of Representatives Economics Committee hearing today in Melbourne.

Moves in Australia’s official cash rate over the last 10 years had prompted lock-step moves in home loan rates because during those times the cash rate was a good proxy for bank funding costs, he said.

But that has not been the case recently as the cost of funds has blown out due to turmoil in global credit markets.

“It is still likely that movements in the official cash rate will have a fair bit of influence, if not one-for-one,” Mr Stevens said.

However, it was unlikely that banks would make rate reductions independently of the RBA lowering the cash rate.

“It’s their call, but it doesn’t strike me as likely,” Mr Stevens said.

The RBA governor’s comments came after Australia’s five major lenders rushed to pass on the full magnitude of the central bank’s 25 basis point cut to the official rate last Tuesday.

But all the banks said further cuts were conditional upon the cost of wholesale funds, with ANZ Banking Group Ltd and Westpac Banking Corp warning that global credit markets were still “volatile”.

National Australia Bank’s chief executive of Australian operations, Ahmed Fahour, said last week that long term wholesale funding costs remain elevated.

He said the bank’s medium and long-term funding – along with its retail deposit base – represents the bulk of the its funding costs.

Nothing the RBA did would have an impact on long-term bank funding costs, Mr Stevens said, adding that the rising costs of rolling over long term funding arrangements had seen the bank’s monthly incremental costs surge by between 10 and 15 per cent.

Nor would precautionary action by banks to maintain a capital buffer in good economic times, to provide funding during a downturn, be a panacea despite record profits and dividends, RBA assistant governor, financial system, Philip Lowe, told the committee.

“It is fundamentally difficult to do as the probability of financial intermediation will occur off the banks’ balance sheet,” he said.

It requires an international agreement because it is very hard for one country to do that by itself, and is on the top of the agenda in international forums, Mr Lowe added.

Mr Stevens thinks the picture for Australia’s banks is a lot brighter than for their offshore counterparts, with capital, asset quality and profitability remaining “very sound” even for those that have had to make provisions for “unwise exposures”.

And lending practices in Australia did not deteriorate to the extent and depth that they did in the US, he said.

“But some fringe players here that took more risk,” he said.

“I think those sorts of loans are disproportionately represented in households where there is mortgage stress.”

Australia is unlikely to see a recurrence of very easy credit anytime soon, he added.

As well, the prospects for a reopening of the local securitisation market are improving, Mr Stevens said.

“Our feeling is that securitisation will be once again a feature of the system – in the mortgage market particularly – but not at the pace we saw,” Mr Stevens said.

“I don’t think securitisation is dead for ever.

“It will get going again.”

Mr Stevens also said US government’s decision over the weekend to bail out of American mortgage finance giants Fannie Mae and Freddie Mac was “the right thing” and positive for markets since it reduced uncertainty.

“I don’t know what it would do to offshore funding costs for Australian banks. I can’t imagine it would worsen,” he said.

Mr Stevens said no-one that he knew of had picked the fallout in the US sub-prime housing market, that has led to tighter credit markets around the world.

“For some years astute observers said pricing for risk was too cheap,” Mr Stevens.

“But no-one that I know picked it.”

Separately, Mr Stevens described the UK economy as “pretty serious” and its housing market as “a parlous situation” and worse than anything Australia faces.


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