• 23/06/2024

Cheap Money Fires Home Loan Competition

The Sydney Morning Herald | 31 July, 2014

Clancy Yeates and Jonathan Shapiro


Australia’s big banks are fuelling their hot competition in the home loan market by ramping up their use of cheap global financing, raising $125 billion on wholesale funding markets in the last financial year.

With global interest rates at record lows, new figures show banks are borrowing more from markets that were a significant source of instability during the global financial crisis.

The trend is good news for borrowers: it is helping to fund bigger discounts on mortgage interest rates, which are at their widest in several years. For savers, however, it is further depressing returns from deposit accounts so that savings are at risk of going backwards after tax and inflation.

During the crisis, Australia’s banks were forced to cut their reliance on wholesale funding markets – where banks borrow from institutional investors.

But with bank borrowing costs at their lowest since 2008, big lenders are tapping these markets more and more, raising $125 billion in wholesale funds last financial year, according to Bloomberg data. This is almost 20 per cent more than in the 2013 calendar year and the highest level of borrowing in several years.

Global rating agency Standard & Poor’s in a report released this week said the banks were benefiting from ”cheaper funding conditions as a result of the unprecedented levels of accommodative monetary policy, both locally and abroad”. The low cost of funds is allowing them to compete for a share of the mortgage market by lowering rates to customers.

”Interest rates being at low levels by historical standards, in addition to offshore wholesale funding costs coming down in recent years, does place the banks in the position where they are more able to compete on price,” S&P senior bank analyst Gavin Gunning said.

In a sign of this increased competition, banks are offering customers deeper discounts off their advertised rates.

But it also means banks are competing less fiercely for deposits. Official figures show ”bonus” saver interest rates have fallen by 50 basis points in the last year, double the 25 basis point fall in the cash rate set by the Reserve Bank.

The Australian banks’ reliance on wholesale funding emerged as a critical weakness during the global financial crisis, when the government was forced to intervene to guarantee the sector’s debts.

But analysts said the recent growth was not a risk to the financial system, because banks now fund a much greater proportion of their lending through deposits.

NAB’s Ken Hanton said he did not think re-emergence of wholesale funding was a problem, saying recent pricing showed there was clearly very strong demand for debt issued by 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,” Mr Hanton said.


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