RBA acknowledges banks' higher funding costs

The Reserve Bank has acknowledged the need for the major banks to raise interest rates outside of the official rate cycle due to the higher price they have paid recently for covered bonds.

Released after the major banks all pushed up their variable mortgage rates by between 0.06% and 0.1%, the minutes acknowledged the higher price the banks paid for funding.

The Commonwealth Bank and Westpac were forced to pay a higher price for $6.6 billion worth of covered bonds in mid-January.

The two banks were forced to pay 175 basis points and 165 basis points respectively over the benchmark swap rate.

“The Australian banks had issued sizeable amounts of covered bonds in a number of offshore markets in recent weeks at these higher spreads,” the RBA February minutes say.

“Furthermore, the cost of swapping funds raised in offshore markets into Australian dollars had increased in recent months.

“There had also been two large issues of covered bonds in the Australian market, which had repriced the local bank debt curve significantly higher.

“Over the same period, Australian banks continued to compete actively for deposits, which resulted in the reductions in most deposit rates not fully matching the recent reductions in the cash rate.

“Collectively, these developments had increased banks’ overall cost of funding relative to the cash rate and had narrowed the difference between banks’ lending rates and funding costs.”

However, the higher funding costs have been dismissed by analysts from investment bank Societé Generale.

“Our calculations suggest that almost all sources of funding of Australian banks except long-term overseas are cheaper than their post-GFC highs and have kept falling since the second half of 2011 in absolute terms,” the bank says.

ANZ has hit back at this report, telling The Australian Societé Generale makes the simple mistake of analysing absolute funding costs, rather than the funding costs relative to the official cash rate.

“We agree that absolute funding costs have been falling, but relative to the official cash rate they have increase.”

Yellow Brick Road founder Mark Bouris agrees that funding costs for new lending have risen but says the game is about “averaging and smoothing out your costs, not just passing them on to your customers”.