Banks passed on all of their funding cost reductions, and then some, to borrowers over the past two years, according to Reserve Bank analysis of banking industry costs.
Banks’ outstanding funding costs declined by a total of around 85 basis points over 2020 and 2021, the RBA reported in the latest Reserve Bank Bulletin.
At the end of 2021, around 5 per cent of bank funding came from the Term Funding Facility, replacing more expensive wholesale funding. TFF allocations were priced at 25 bps initially and later 10 bps.
Sixty per cent of bank funding at the end of 2021 was from deposits (compared with 55 per cent in 2019), with most of the flow going into low-cost at-call accounts. The share of debt funding from low-rate deposits (between zero and 25 bps) was close to 40 per cent in the September quarter last year, compared with around 15 per cent in late 2019.
The RBA said that over the two years housing loan rates paid by borrowers fell by 100 bps and business interest rates by 115 bps.
This reflected the impact of refinancing and competition in mortgage lending, as well as a shift in the composition of bank lending to lower margin products, the RBA said.
Banks started to increase fixed mortgage rates in the second half of last year but the RBA said the effect of these increases on average outstanding housing rates has been limited, as borrowers responded by increasing their uptake of low-rate variable loans and shifted away from longer-term to shorter-term fixed-rate mortgages.
Average interest rates on new small business loans also increased in late 2021, while rates on medium and large business loans were little changed.
The cost to banks of issuing new wholesale debt increased towards the end of 2021 but this has had little immediate impact on total outstanding funding costs so far.
“In late 2021, swap rates rose sharply and spreads between bank bond yields and these rates also rose. Higher issuance costs may impact banks’ funding costs over time as they issue more new debt, to the extent that this issuance is more costly than maturing or existing funding,” the RBA said.