Customer deposits account for around 60 per cent of banks’ total funding – an increase of about 5 percentage points since the pandemic began. And the proportion of deposits paying low interest has also risen.

According to the latest Reserve Bank Statement on Monetary Policy, banks’ overall funding costs remain close to historic lows, notwithstanding the recent rise in bond yields.

Money borrowed under the Term Funding Facility and low deposit rates are the big contributors to low funding costs.

Banks borrowed A$188 billion of TFF funds, at a cost of 25 basis points initially and then 10 bps. Repayments start in September 2023 and continue through to mid-2024.

On the deposit side, the RBA said that in the September quarter close to 40 per cent of the debt funding of major banks was in the form of deposits paying interest rates of 25 bps or less. 

This compares with a little over one-third at the end of February this year and around 15 per cent in late 2019.

The RBA said ongoing purchases under its bond purchase program would continue to contribute to the growth of low-cost funds for banks in the period ahead. When the RBA buys bonds the sellers deposit the proceeds with banks.

“In addition, because banks drew significantly on the TFF, they largely refrained from issuing new bonds during the TFF drawdown period, while outstanding bonds continued to mature,” the RBA said.

“Further declines in overall funding costs are expected to be limited. 

“Bank bond yields have increased in recent months, making it more costly to issue new debt. This will, in time, contribute to upward pressure on average funding costs.