Rba Offers Little Consolation On Long-term Funding Rates

The Age

Tuesday September 9, 2008

Eric Johnston, financial services editor

BANK executives have warned that long-term funding costs are likely to remain high well into next year, dampening chances that borrowers will be given relief on interest rates outside any cuts by the central bank.

The comments come as the Reserve Bank yesterday declared banks were unlikely to volunteer reductions in loan rates independently of the RBA lowering the cash rate.

Australian banks source about 55% of their balance sheet funding from wholesale markets. Half this is in the form of longer-term funding, which remains persistently high.

"Nothing the RBA does has any effect on those rates," RBA governor Glenn Stevens told the House of Representatives Economics Committee yesterday. He said banks had found that as their three and five-year term funding rolled over, it was being replaced by higher-priced funding.

National Australia Bank's chief executive of Australian operations, Ahmed Fahour, recently told an analyst briefing that long-term bank funding costs were expected to remain higher well into next year.

Brokerage Merrill Lynch yesterday noted that the cost of of five-year debt had moved to as much as 100 basis points above the bank bill swap rate from just 20 basis points above before the credit crunch set in.

"Long-term rates are still under incredible pressure," a second executive from a major bank said yesterday.

Mr Stevens said Australian banks were weathering the financial storm well.

"Some have had to make provisions for unwise exposures that had been accumulated earlier," he said.

"But even in these cases capital, asset quality and profitability remain very sound."

In a bright spot for borrowers, Mr Stevens was optimistic that securitisation markets were starting to reopen, paving the way for smaller competitors to return to the sector.

This would also ease a funding impasse for smaller banks such as St George or Suncorp-Metway that have been heavy users of securitisation to fund their loan books.

Banks have tightened their grip on the nation's mortgage market over the past year assmall lenders have beenforced to pass on additional funding costs to borrowers.

The closure of securitisation markets forced some such as RAMS Home Loans into a sale while others such as Bluestone Financial have been forced to slow the pace of lending.

"Securitisation will be once again a feature of the system," Mr Stevens told the committee. But he believes it is unlikely to return to the "rapid pace" experienced before international financial turmoil began.