Australian banks are no longer relying heavily on the wholesale funding markets. Instead it has turned to the retail deposit for low interest rates since the start of the global financial crisis.

Reserve Bank of Australia (RBA) Assistant Governor Guy Debelle disclosed on Monday that the four big Australian banks enjoyed an 11 per cent annual growth rate for deposits, which has overtaken the flat credit growth of 5 per cent.

However, Mr Debelle encouraged the banks to ensure their banks to have diverse sources of funds instead of relying heavily on deposits.

He suggested that banks look into covered bonds which were introduced in Australia in October to help banks diversify their source of funds, while having a minor impact on funding cost. ANZ and Westpac issued the covered bonds and raised $2.25 billion in the U.S. last week.

The issuance of covered bonds was the result of the approval in mid-October by the federal government of legislation which capped the value of such bonds issued by Australian banks to 8 per cent of their total balance sheet. The cap would help ensure that the banks would have a good mix of financing, Mr Debelle said at the Australian Securitisation Forum in Sydney.

"A world where the only source of funding available is secured is just not sustainable," Mr Debelle said.

Due to the change in funding base is the past four years, the big four banks raised the same amount of cash from the wholesale market but it share of total funding source has gone down.

With the covered bonds, Mr Debelle said that Australian banks could raise up to $130 billion over the next few years as they tap new sources of funding.

The Commonwealth Bank is expected to release its maiden covered bond issue in euros within the week, while the National Australian Bank is also expected to issue its own covered bond soon.

"Any pricing gain obtained from issuing covered bonds is likely to be offset to some extent by a demand from unsecured debt holders for more compensation in the future.

"So I see the role of covered bonds as primarily broadening the potential investor base rather than a means of reducing overall funding costs for banks," Mr Debelle said.

Mark Bayley, senior credit strategist of Aquasia, agreed that while the bonds will provide banks with a new potential investor universe and improve their funding diversity, it will not bring down cost of funds.

"It does little to help the smaller, regional banks, building societies and credit unions lower their cost of funding and diversify their funding sources," The Australian quoted Mr Bayley.

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