Foreign funding high and increasing

Sources of bank funding have changed markedly over the last 10 years.

A review of trends in the financial system by the Reserve Bank of Australia's financial stability department shows that retail deposits accounted for 20 per cent of bank funding at June 2007. Ten years earlier deposits provided 34 per cent of bank funding.

Wholesale funding as a result accounts for 80 per cent of aggregate bank liabilities, and banks are increasingly likely to raise these funds offshore.

So while in 1997 banks would raise $3 of wholesale funding from the domestic market for every dollar raised offshore that ratio is now $2 raised locally for every dollar raised offshore. Foreign wholesale liabilities thus now fund 27 per cent of bank balance sheets and domestic liabilities fund 53 per cent.

Chris Ryan and Chris Thompson, of the bank's financial stability department, write in the paper that nearly all of the banks' offshore borrowings are hedged and that as a result these borrowings cost the same, on average, as domestic wholesale funding.

The authors cite surveys by the Australian Bureau of Statistics that net foreign-currency debt on the balance sheets of Australian banks rose from $117 billion in June 2001 to $186 billion in March 2005. Of this, $168 billion was hedged in derivatives markets, mostly by cross-currency swaps and also by forward contracts, leaving a net
foreign-currency exposure on debt of $18 billion.

Once banks' foreign currency equity positions are taken into account, banks had a small net foreign currency asset position, according to the RBA.

The RBA said that the average term of offshore bonds has also been rising, and that at six years was around the same as that for bonds issued domestically.

And in a sentence no doubt informed by the recent turmoil in credit markets the authors write that "while in the past foreign investors have tended to be just as willing to roll over their debt securities as have domestic investors, should this prove to not be the case in the future, the Reserve Bank could provide Australian dollar liquidity in return for good collateral."