Funding costs, interest rates have fallen: RBA

by AB24 Mar 2014
Absolute levels of banks’ funding costs and lending rates have fallen over the past year, the Reserve Bank of Australia said in its quarterly bulletin.

Despite falls over the past year, banks’ funding costs remain close to 130 basis points higher than before the onset of the global financial crisis.

"Banks experienced a fall in overall funding costs over the past year, reversing a trend of increases since the onset of the GFC," the RBA said.

"The absolute levels of banks’ funding costs and lending rates fell over the past year, while spreads between these rates and the cash rate have narrowed marginally."

The RBA said the decline in these spreads largely reflects the shifts in the composition of banks’ funding liabilities and the narrowing of wholesale debt spreads.

During 2013, the average interest rate on outstanding variable-rate housing loans drifted lower relative to the cash rate.

The average interest rate on new variable-rate housing loans fell by about 10 basis points relative to the cash rate as discounts were increased, and there were drops to the average interest rate on some new fixed-rate housing loans too.

This was consistent with the small reduction in banks’ overall funding costs relative to the cash rate over the period, suggesting that risk and profit margins remained largely unchanged, RBA said.

When setting lending rates, banks take account of the cost of funding liabilities, the required return on equity, and the risk margin designed to cover potential losses from making a loan.

Since the onset of the global financial crisis, increases in the cost of some of these factors – predominantly an increase in banks’ funding costs – have contributed to a widening of the spread between lending rates and the cash rate, RBA said.