A key driver of the fall in banks’ net interest margins over the past couple of years has been the 60 basis point decline in the spread between lending rates and funding costs.
The Reserve Bank has delved into banks’ funding arrangements in an article in the latest Reserve Bank Bulletin, reporting that banks’ non-equity funding costs rose 380 basis points during the period of Reserve Bank monetary policy tightening, between May 2022 and December 2023, while the cash rate increased by 425 bps.
At the same time, lenders increased rates on outstanding mortgages by a total of 320 basis points.
As a result, in the two years to December 2023 the spread between lending rates and funding costs declined 60 bps to around 190 bps.
A key funding benchmark, bank bill swap rates, rose by around the same amount as the cash rate. Rates on new term deposits increased by a little more than the increase in the cash rate – 435 bps.
But rates paid on at-call deposits and on long-term debt increased by less than the cash rate. The average interest rate on outstanding at-call deposits increased by around 275 bps over the period. Rates on total deposits increased by 325 bps.
The desire among banks to attract more term funding as the TFF matured explains the higher rates for term deposits relative to at-call deposits.
The outstanding rate on long-term debt increased by 245 bps, largely because the stock of major bank long-term debt turns over more slowly, given its weighted average maturity of four years.
The RBA’s data reinforce the ACCC’s finding in its recent review of deposit rates that the banks have been “strategic” in passing on rate increases in such a way as to limit the overall increase in their deposit funding.
This approach included raising rates more on savings products with conditions and time-limited introductory offers than on standard deposit products.
Changes in funding composition, including the replacement of Term Funding Facility loans with other sources of funding and customers moving their savings from lower to higher rate products, accounted for around 25 bps of the increase in funding costs over the period.
Hedging of fixed-rate liabilities back to floating rates added about 70 bps to funding costs.
Deposits are the largest component of banking funding - and rising. Funding from deposits has grown by around half a percentage points since early 2022.