Reductions in deposit rates in 2020 will continue to flow through to banks’ overall funding costs this year, as changes in new term deposit rates take time to flow through to the stock of deposits, the Reserve Bank says in its latest assessment of banks’ funding position.
An article on banks’ funding costs and lending rates in the latest RBA Bulletin shows that the share of bank non-equity funding from deposits increased substantially in 2020 year to more than 60 per cent on average.
There was a corresponding decline and short and long-term wholesale debt funding.
Most new deposits went into low-rate at-call accounts and there was also some switching from term deposits to at-call accounts, given the decline in the spread between interest rates on term and at-call deposits.
Interest rates for new term deposits from households fell by around 95 bps over the year, while rate for new at-call deposits declined by around 40 bps.
The share of bank deposits paying low rates (between zero and 25 bps) rose to around 25 per cent for the major banks, compared with 15 per cent in 2019.
The RBA said that overall, the reduction in banks’ funding costs in 2020 tracked the 70 basis point fall in the cash rate to historically low levels.
Aggregate lending rates declined by a similar amount to the reduction in funding costs, although the extent of reductions differed across variable and fixed rate loans.
Interest rates on existing variable rate housing loans fell by around 50 bps over the year, while rates on new fixed rate housing loans fell by around 90 bps.
Interest rates on outstanding business loans fell by a little more than the decline in banks’ overall debt funding costs.
Funding available under the RBA’s term funding facility accounts for around 2 per cent of the major banks’ non-equity funding. Access to the TFF, which was set at a rate of 25 bps over three years, helped reduce funding costs.
The fall in wholesale funding costs was reflected in the decline of bank bill swap rates, which fell by 85 to 100 bps over the year.