RBA explains banks’ profit protection
(23 March 2012 – Australia) The Reserve Bank of Australia (RBA) has commented on banks lifting interest rates to protect profits after seeing their own borrowing costs climb following the global financial crisis.
While not commenting directly on whether recent rate increases were "appropriate", RBA assistant governor Guy Debelle said local banks were charging local borrowers more to cushion their profit, but noted that the cost of money to Aussie banks had risen relative to the RBA's rate.
The average cost for the major banks' funding has risen by between 1.45-1.55 percentage points over 2007 levels, he said.
'Financial institutions have increased their lending rates in the face of the increase in costs to maintain their net interest margins within the range observed in recent years,' said Debelle.
'In turn, this has been with the aim of maintaining profitability.'
Australia's big four banks have been seeking to maintain profits near record levels even as demand for financial services remains weak and some of their funding costs have risen. The RBA has lately made several statements affirming part of the banks' reasons for lifting interest rates - even as the central bank stayed put.
Data compiled by the RBA shows that the average cost of the major banks’ funding was between about 1.2-1.3 percentage points higher relative to the RBA's cash rate compared with the levels seen in mid-2007 - just prior to the global financial crisis.
'Most of the increase occurred during 2008 and early 2009 when the financial crisis was at its most intense,' said Debelle.
'Since the middle of 2011, however, there has been a further increase in banks’ funding costs relative to the cash rate of the order of 20-25 basis points.'
The detailed explanation of funding costs comes about six weeks after ANZ Bank lifted mortgage rates independently of the RBA, unleashing a round of rate rises by its main rivals that sparked anger from politicians and the public.
The average cost for the major banks' funding has risen by between 1.45-1.55 percentage points over 2007 levels, he said.
'Financial institutions have increased their lending rates in the face of the increase in costs to maintain their net interest margins within the range observed in recent years,' said Debelle.
'In turn, this has been with the aim of maintaining profitability.'
Australia's big four banks have been seeking to maintain profits near record levels even as demand for financial services remains weak and some of their funding costs have risen. The RBA has lately made several statements affirming part of the banks' reasons for lifting interest rates - even as the central bank stayed put.
Data compiled by the RBA shows that the average cost of the major banks’ funding was between about 1.2-1.3 percentage points higher relative to the RBA's cash rate compared with the levels seen in mid-2007 - just prior to the global financial crisis.
'Most of the increase occurred during 2008 and early 2009 when the financial crisis was at its most intense,' said Debelle.
'Since the middle of 2011, however, there has been a further increase in banks’ funding costs relative to the cash rate of the order of 20-25 basis points.'
The detailed explanation of funding costs comes about six weeks after ANZ Bank lifted mortgage rates independently of the RBA, unleashing a round of rate rises by its main rivals that sparked anger from politicians and the public.
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