The convergence of interest rates paid on deposits with rates of return earned on wholesale investment will persist. This force will help to drive the flow of funds away from banks and towards intermediation by the capital market, the Australian Centre for Financial Studies argues in its "Funding Australia's Future" study.Bank lending growth will also remain subdued, at around the rate of growth of nominal GDP.Rodney Maddock, adjunct professor at Monash University's Department of Economics, and Peter Munckton, former general manager for strategy at the Commonwealth Bank, prepared the paper for the ACFS."We expect the pressure on banks to retain a high proportion of retail deposit funding will be sustained," Maddock and Munckton wrote."At best, we expect banks' ability to borrow offshore to grow at the same rate as their deposit funding. "As such, it constrains banks' capacity to lend and has consequences for their rates of growth and their business models. "The change makes banking growth very dependent on the extent to which households are willing to save and on the form such saving takes. Almost certainly it means that banks will have to pay more for retail deposits (that is, closer to the rates available in other outlets for household savings). "It also means that bank lending growth is likely to settle at the rate of growth of deposits, which will probably be close to the rate of growth of nominal GDP. "The inference we should draw is that competition will force banks to pay prices which compare with the returns available in equities (risk-adjusted) and superannuation (duration adjusted). "In our view, this means that deposit rates will settle at a level not far from the returns available in wholesale markets. This will have major consequences for the structure of, and competition within, the financial sector." Maddock and Munckton observed that one countervailing force was that "self-managers [of superannuation] make very different asset allocations to professional managers, maintaining a lot more cash and a more domestic focus.""Potentially, this increases the pool of funds available to banks. It also suggests that individuals are not happy with the allocations made by the professionals, although it is unclear who will change." Maddock and Munckton predict that "many mid-sized institutions seem likely to disappear as the market structure evolves to support scale players and niche players, not mid-sized generalists.""The convergence of retail deposit rates towards wholesale market rates reduces some of the advantages banks have had in funding and improves the relative position of other vehicles which fund themselves in the wholesale market. "As a result, market-funded institutions are likely to grow relatively faster. This is another example of how markets and institutions compete."