RBA Justifies Higher Costs Pressure on Banks to Preserve Earnings
Australian banks were aiming to preserve their profit margins when the decision was made to move up interest rates, breaking away from the cash rate set by the Reserve Bank of Australia (RBA) in recent months.
In effect, local banks have exceeded the benchmark imposed by the central bank to offset the effects of higher funding costs, according to RBA assistant governor for Financial Markets Guy Debelle.
"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," the RBA official was reported by the Australian Associated Press (AAP) as saying on Thursday.
The banks' actions can only be interpreted as measures to maintain profitability in the face of rising funding costs, which started increasing in the most difficult periods of the global financial crisis in 2008, Debelle said.
The pressures came bearing down in recent years as the financial crisis that now besets many key economies was just breaking out.
And the domestic situation was not of any help too, Debelle said, leading to further complications that compelled the banking industry to adopt measures that would at least sustain profitability.
By RBA's estimates, funding spiked by up to 1.55 percentage points, Debelle said, adding that "most of the increase occurred during 2008 and early 2009 when the financial crisis was at its most intense."
A breathing room was only seen by the middle part of last year, the RBA official said, when "the absolute level of banks' funding costs fell from mid-2011 to February 2012, but by less than the reduction in the cash rate."
Within the same period, however, the RBA saw "a further increase in banks' funding costs relative to the cash rate of the order of 20-25 basis points," most of which were attributed to the pricing of deposits.
Yet by the first quarter of the current year, the financial markets were experiencing some form of relief, which the European Central Bank (ECB) took advantage by inserting liquidity, Debelle said.
As a result, funding costs somewhat eased down though the level hovers between 120 and 130 basis points, still higher than prior to the onset of the GFC, according to Debelle.
"Since the onset of the financial crisis banks have increased the spread between lending rates and the cash rate for all loan types ... partly reflecting differences in the reassessment of the riskiness of those loans and expectations regarding loss rates," The Australian quoted Debelle as saying.
Debelle noted too that the country's banking system is unique in a way that "the link between movements in the cash rate and lending rates in Australia is much tighter than in many other countries."
That should explain, he added, why the RBA seriously factor in banking costs into shaping up the country's cash rate if only to ascertain that "the structure of interest rates in the economy is consistent with the desired stance of monetary policy."