Banks should lengthen the tenor of offshore funding
Australian banks issuing bonds in offshore markets have lengthened the average maturity of their securities in recent years, but not by enough.A paper in the latest Reserve Bank Bulletin, The Nature of Australian Banks' Offshore Funding, reports that currently offshore funding makes up around one-third of the major banks' total funding, evenly split between deposits, short-term and long-term debt. The maturity of the Australian majors' offshore bonds is shorter than that of other banks issuing in the same markets. This exposes them to a greater rollover risk, the paper argues.The paper cites the Council of Financial Regulators, which recently concluded that it was not necessary to introduce measures to discourage Australian banks from using offshore funding."However, it agreed that a further lengthening of the maturity of their offshore borrowing would reduce the rollover risk for banks and the broader financial system," the paper says.Offshore funding exposes banks to higher rollover risk than domestic funding for two reasons. One is that investors tend to reallocate their portfolios away from foreign investments and towards domestic ones during times of stress in global financial markets.This increase in investor home bias can make it especially hard to roll over offshore funding at such times.The second reason is that banks borrowing in foreign currencies often don't have access to central bank liquidity support in that same currency.Since the financial crisis Australian banks have reduced the share of funding coming from short-term debt markets and increased the share coming from deposits.The average residual term to maturity for offshore bonds issued by Australian banks has risen in recent years, from 3.55 to 4.5 years. "This is still well below the average residual maturity of bond issuance by most other developed countries' banks," the paper says.The degree of rollover risk for banks depends on both the characteristics of their funding and that of the assets the funding is used to acquire. At June 30, the Australian major banks had about A$95 billion more offshore liabilities than offshore assets maturing within 30 days."While this maturity mismatch is conventional for banking, home bias risks inherent in offshore funding add an additional complexity to net funding pressures than if it was created by domestic retail deposits."The paper points out that a significant portion of offshore funding is raised in New Zealand and does not pose the same rollover risk as other foreign funding.