Could the banks be forced to play the “big bad wolf” once more?

Suggestions that the Reserve Bank could keep interest rates on hold for the remainder of the year due to various local and global factors will come as welcome news to borrowers. However the threat of rising rates is not necessarily over, with the banks (and therefore customers) remaining vulnerable to an increase in world credit market borrowing costs.

In a special report on the big four banks, Fitch Ratings says the heavy reliance of Australian lenders on international funding is placing increased pressure on borrowing costs for consumers and leading to higher interest rates.

Revealing their findings on the ABC earlier this year, Fitch Ratings senior director John Miles said the cost of credit in international markets has increased since the global financial crisis.

This is having a direct impact on the banks, who fund their lending not only from customer deposits, but also wholesale funding, including finance from other financial institutions, fund managers and life insurers, both locally and internationally.

The interest rates paid by banks for their finance is determined by credit market rates, which are separate from official interest rates set by the Reserve Bank.

Miles said, “When you look at the demand for that funding it does suggest the Australian banks may possibly be running up against limits from the offshore wholesale investors as to how much they are prepared to lend to this country and the banks in this country.

“When that happens it’s a simply a function of supply and demand and that can potentially push up the cost of funding.”

While the banks were painted as villainous Grinch’s at the end of last year when they upped their retail rates independent of the RBA, Miles says these hikes were directly related to their higher cost of borrowing.

ANZ, Westpac, the Commonwealth Bank and the National Australia Bank need to borrow more than $100 billion this year to finance new lending and existing loans, and will have to roll over loans that were backed by a government guarantee on borrowing by financial institutions during the height of the GFC. This, according to Miles, is yet another factor that may increase the cost of bank finance.

Additionally, the banks could take a hit to their profit margins this year according to Fitch, who says weaker demand for credit from consumers is likely to lower returns for the big four and thus diminish returns for their investors.


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