Banks subsidise rate cuts in home loan market

by Julia Corderoy31 Jul 2014
Banks have turned to wholesale funding, borrowing from institutional investors, to subsidise the deep cuts made on interest rates for fixed home loans, according to the Sydney Morning Herald.
The Herald has reported that banks have raised $125 billion on wholesale funding markets in the last financial year. This is almost 20% more than last year, and the highest level of borrowing that has been seen in many years.
With interest rates at all-time lows, this is helping to subsidise the money banks are missing out on when it comes to the mortgage lending market. Low interest rates also mean that the banks are not competing for core demand deposits – deposits made in the bank’s general market, by consumers or businesses. So savers are missing out on interest paid by the bank, too. According to the Herald report, figures show “bonus” saver interest rates have fallen by 50 basis points in the last year.
During the GFC, the reliance on wholesale funding as a source of financing became a problem and the government had to intervene, but Ken Hanton from NAB told SMH the recent increase in wholesale funding is no cause for alarm because of the strong demand for lending from banks.
''Banks are now lending more out than they are taking in deposits on top of a need to refinance a steady stream of maturing debt,'' Hanton said.