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When the RBA raised the official cash rate 25 basis points in April, the governor said in his statement on monetary policy that lenders have “generally raised rates a little more than the cash rate”. 
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On average, the majors have raised their bank rates by 11 basis points more than the RBA.
In the last six meetings, the board has lifted the official cash rate by 125 basis points, while the majors have, on average, lifted their rates 136 basis points.
So why is there a discrepancy? And why is the cash rate no longer a good guide to predicting how the banks will price their products?
The answer lies in the hefty price that banks are still paying for their funding. While the Australian economy is once again surging forward, much of the rest of the world remains in deep trouble, and a large portion of Australia’s funding comes from overseas.
Despite the stellar performance of Australian mortgages in comparison with most other markets, the fact remains that capital markets are still carrying significant premiums for term funding, particularly for mortgages.
But funding costs have improved from their highs of a year or so ago, so why are the banks crying poor?
The problem that lenders now face is the re-pricing of their portfolios. Cheaper funding secured prior to the GFC has now expired and has to be replaced by more expensive capital.
ING DIRECT’s head of treasury Glenn Baker says the overall cost of funding will continue to rise until cheaper funding than that which was acquired during the financial crisis starts to positively affect portfolio pricing.
“However, this is unlikely to happen over the next 12 months,” Mr Baker says.
UNEVEN PLAYING FIELD
Although the rising cost of funds continues to hurt all lenders, Mr Baker says second tier lenders and non-bank lenders alike are facing long term structural disadvantages compared to the big four.
A recent review of Australia’s top five bank’s funding costs found that second tier banks are facing higher funding costs and lower margins on home lending than other lenders.
Mr Baker says the disadvantage facing second tier banks is being exacerbated by the national shortfall in savings.
“The shortfall in savings and reliance on securitisation means second tier banks are at a clear disadvantage to the big four banks,” he says.
“Since the global credit crisis, second tier banks are paying relatively more for funding than the big four and the longer term trend is for this imbalance to continue.”
But savings aside, Mr Baker says there are indications to suggest that the cost of various funding sources has stabilised – a point RESIMAC’s director of securitisation Mary Ploughman agrees with.
Ms Ploughman says there are clear signs of recovery in the term capital markets, and that markets could begin to improve as early as next year.
“In Australia, our mortgages have outperformed other comparable jurisdictions, which have lead to strong investor interest in our residential mortgage-backed securities. The outlook is positive for global securitised markets throughout 2010/11.”
Ms Ploughman says once there is stabilisation in the global financial markets and the broader economy, costs of funding should start to head back to pre-GFC levels, which would be a welcome relief for lenders.
For the time being however, Australia is heavily reliant on offshore funding of public and private debt, and is obviously impacted by the GFC overhang still present in the United States of America and Europe.
