RBA: funding changed, margins up
(22 June 2009 – Australia) In its latest bulletin, the RBA has found that the funding makeup has changed for banks making it less dependent on the cash rate, while margins have increased in recent times.
In an examination of the funding costs of Australia’s banks during the market turbulence causes by the global financial crisis, the Reserve Bank of Australia (RBA) found changes to the norm of the past decade.
The RBA said that while for much of the past decade banks’ funding costs have tended to move in line with the cash rate, this has not always been the case; where the banks’ lending rates varied independently of the cash rate.
The RBA found in its report that the recent financial turbulence means that, while the cash rate remains a key influence on banks’ funding costs, the costs of the various forms of banks’ funding have not fallen as much as the cash rate.
This is because other forms of funding have been subjected to an increase in term premia and credit and liquidity spreads.
Despite the costs of other funding sources, the RBA said that the major banks’ Net Interest Margin (NIM) is above the level before the onset of the financial market turbulence in mid 2007. It currently averages 2.27 percent.
It has been businesses, however, and particularly SMEs that have felt the rise in margins. Banks have cut variable housing loan rates more than the fall in their cost of funds, but reductions in business lending rates have been less, the RBA said.
Overall, banks’ net interest margins have risen a little recently, offsetting the fall that occurred in the early part of the financial crisis, the RBA concluded.
The RBA said that while for much of the past decade banks’ funding costs have tended to move in line with the cash rate, this has not always been the case; where the banks’ lending rates varied independently of the cash rate.
The RBA found in its report that the recent financial turbulence means that, while the cash rate remains a key influence on banks’ funding costs, the costs of the various forms of banks’ funding have not fallen as much as the cash rate.
This is because other forms of funding have been subjected to an increase in term premia and credit and liquidity spreads.
Despite the costs of other funding sources, the RBA said that the major banks’ Net Interest Margin (NIM) is above the level before the onset of the financial market turbulence in mid 2007. It currently averages 2.27 percent.
It has been businesses, however, and particularly SMEs that have felt the rise in margins. Banks have cut variable housing loan rates more than the fall in their cost of funds, but reductions in business lending rates have been less, the RBA said.
Overall, banks’ net interest margins have risen a little recently, offsetting the fall that occurred in the early part of the financial crisis, the RBA concluded.
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