Banks Recovering From Crisis

The Age

Tuesday October 21, 2008

Eric Johnston

SIGNS of life have returned to bank funding markets as measures by governments around the world revive frozen interbank lending markets.

Australian banks' borrowing costs fell to the lowest in more than a month, bolstering hopes the worst of the funding crisis has passed.

Banks stopped lending to one another after Wall Street company Lehman Brothers shattered global credit market confidence when it filed for bankruptcy last month.

Commonwealth Bank yesterday became the latest major bank to cut standard variable interest rates, joining National Australia Bank and ANZ in unwinding some of the rate hikes passed on to customers earlier this year.

Banks were charging one another 57 basis points above the bank bill swap rate for three-month loans, down from 75basis points on Friday.

The gap has averaged 44basis points this year.

Meanwhile, key global benchmark, the London interbank offered rate or Libor, dropped on Friday for the fifth consecutive day, taking total falls to 40 basis points last week.

CBA said it was planning to cut its variable rate on mortgages by 21 basis points while slicing 40 basis points from its fixed home loan rates.

"We have seen some reduction in our cost of funding over the past week," said CBA group executive of retail banking services Ross McEwan.

"The Commonwealth Bank is committed to remaining extremely competitive in the mortgage market."

NAB, which at the weekend cut 20 basis points from its standard variable loans, said it would also extend the cut to some business loans.

Despite easing in funding costs, banks say the funding costs remain persistently high and the latest cut in mortgage rates is likely to crimp margins. "Our short-term costs of funds have doubled since the start of September," a bank executive said yesterday. "The government guarantee has helped the cost come down but its still high in absolute terms."

Meanwhile Liberty Financial yesterday also cut interest rates , slicing 75 basis points from a range of loans.

Regional banks such as Bank of Queensland, Suncorp-Metway and Bendigo Bank have been pushing for a level playing field when it comes to using the Government's guarantee on offshore wholesale funding.

"Be under no doubt that the Federal Government wants to foster completion as it provides billions of dollars of support to the big banks," brokerage EL & C Baillieu told clients in a note.

It is believed BoQ has hired former prime minister Paul Keating to lobby its case for equal treatment under the program.