Same reliance on foreign funding

The structure of the liability side of bank balance sheets is not all that different after more than two years of upheaval in financial markets: they are just a lot larger.

Ric Battelino, deputy governor of the Reserve Bank of Australia, provided some fresh comparative analysis of the liability side of the balance sheet of Australian banks yesterday. He was speaking at the Australasian Finance & Banking Conference 2009, hosted by the University of New South Wales.

The major change - and one that Battelino strongly implied may not be long lasting - is the rise in the proportion of liabilities funded by deposits.

Perhaps seeking a polite term to describe the funding arrangements of the sector, Battelino said banks in Australia have "reasonably diverse funding bases".

Deposits now account for 43 per cent of bank funding, a rise of five percentage points over the last two years or so.

These are split "fairly evenly" between households and businesses, Battelino said. The bank deposit pool at October 2009 was $764 billion. Household deposits accounted for 58 per cent of these, APRA data show.

He suggested that the rise in the level of funding from deposits may have peaked.

"For the banking system as a whole, the share of deposits in total funding can increase only to the extent that investors reduce their holdings of securities and place the proceeds on deposit with banks.

"There are limits to the extent this can happen since there are a range of structural, economic and cultural factors that shape the composition of a financial system, and these do not change quickly.

"In fact, the trend in most economies is for savings over time to move away from simple instruments such as bank deposits towards debt securities and equities.

"To try to shift savings back to deposits would require a reversal of these trends, and there must be doubts about how feasible that would be."

In this context - and noting the huge margins over the cash rate paid for some deposits at present - Battelino was in effect suggesting that banks must now be robbing each other of deposit sources rather than attracting money back from, say, the stock market.

Domestic capital markets provide a further 19 per cent of funding; foreign capital markets 28 per cent; the dregs of the securitisation sector provide three per cent equity accounts for the final seven per cent of funding (Graph 1).

So the major shift over the course of the credit crunch and follow-on crisis is the shuffle by domestic investors of funds from instruments classed as capital markets securities (and with hazy rights of priority in a liquidation) into conventional bank deposits (which rank first in a bank wind-up under Australian law).

The proportion of foreign funding has not really shifted over the course of the crisis (though this is down a touch for regional banks and up for foreign banks).

One insight in his speech, and drawn from fresh RBA research into the topic, is whether or not banks in Australia are unusually dependent on liabilities other than deposits.

The new RBA view is that they are not, and that with a deposit share (including wholesale money classed as certificates of deposit) of 61 per cent in 2008, Australian banks are typical of bank liability patterns in Britain, Canada, Germany, Japan and the United States.