RBA Backs Aussie Banks’ Claim That Funding Cost Went Up

The Reserve Bank of Australia (RBA) has backed the claim of Australian lenders that funding costs sourced from overseas have risen.

RBA Governor Glenn Stevens said that while the central bank's cash rate has gone down 50 points since the middle of 2011, costs of funding the books has not come down that much.

"Relative to the rate we set, the funding costs have gone up a little but because they haven't fallen as much as the cash rate and the banks have responded to that in a way that you would expect thy would," ABC quoted Mr Stevens.

Christian Carrillo, head of interest rate strategy of French lender, Societe Generale, said on Monday that the Australian banks' claim of higher funding costs is disproved by data from the RBA and the Australian Prudential Regulation Authority. He said over the past six months, overall funding costs for Aussie lenders actually went down and the banks hiked their interest rates despite the RBA keeping the overnight cash rate at 4.25 per cent to protect their high profit margin.

Mr Stevens cited minutes of the RBA's monetary board Feb 7 meeting which stated that markets were effectively closed for most Australian banks to raise money offshore in the last few months of 2011 because investors were too scared to lend to banks out of fear of a European financial meltdown. When the markets opened again in January, banks had to pay a much higher rate to borrow money. The cost of swapping the borrowed funds from U.S. dollars or euro into Australian currency also went up, the governor added.

However, while CLSA banking analyst Brian Johnson pointed out that there is evidence in the banks' profit reports that their cost of funding has gone up vis-à-vis the overnight cash rate, he estimated their returns on equity to be between the 16 to 19 per cent range.

"The absence of economic pricing in the securitisation markets gives the banks a tremendous amount of pricing power and that's how they've been able to pass on a lot of this rising cost of funds to borrowers," Mr Johnson told ABC.

Australian Bankers Association Chief Executive Stephen Munchenberg debunked Mr Carrillo's report. He insisted there is no conspiracy between the major banks, smaller banks, building societies and the RBA which all agreed that the cost of funding has gone up.

Minutes of the RBA meeting released on Wednesday said that future interest rate cuts are dependent on developments in the eurozone debt crisis. Even before the Tuesday bailout deal for Greece, the RBA was optimistic that the European crisis was moving in the right direction.