Sydney, 15 July, 2008: The Australian Bankers’ Association (ABA) said banks’ explanations provided after recent increases in interest rates show they are making balanced decisions in a difficult environment.
The increase in wholesale funding costs due to the US sub-prime crisis has affected banks around the world, as well as Australian banks, forcing increases in interest rates on retail loans.
Banks source their funds from their deposit base and through wholesale funding1 - short-term and long-term funds in both the domestic and global capital markets.
When the term of any funding arrangement expires, banks have to re-finance or rollover their wholesale funding in a market which is volatile and where the cost of those wholesale funds has increased significantly over the past year.
Due to the protracted nature of the sub-prime crisis, now into its 11th month, pressures in financing from the wholesale market will continue to persist.
Despite this, banks will continue to balance the interest of their customers and shareholders as the effects of the sub-prime crisis unfolds.
Banks have been measured about the impact on their customers of increasing interest rates.
In the early months of this crisis, banks took a conservative approach and did not pass on to customers any of the increases in the wholesale funding costs, as they wanted to understand whether the changes being experienced were going to be sustained.
Ian Gilbert, Acting Chief Executive of the ABA said: “In January this year, banks passed on only a small amount to customers and subsequently have only moved interest rates in increments, while at the same time, monitoring the increase in wholesale funding costs, which remain highly volatile.”
“The simple fact is that banks, like any other businesses, have to adjust their prices when their cost base significantly increases.”
“By absorbing some of this funding increase, banks have shielded customers to some extent from the impact of the increased funding costs. The fact that banks have been able to do this demonstrates the value of a strong, well capitalised and competitive banking sector.”
“It is premature to question competition in the housing loan market. We are, after all, in the midst of a volatile global financial environment which is impacting on all financial institutions and their lending markets. It is important to note that all institutions, including banks, are being affected by significantly slower loan volume growth. Competition between the banks, more than 150 credit unions and building societies, and other lenders continues,” Mr Gilbert said.
Despite the rises in interest rates, banks’ lending portfolios are exhibiting sound quality and low defaults. This demonstrates responsible lending practices.
Mr Gilbert said bank customers are encouraged to review their financial position and budgeting to ensure that their arrangements are appropriate for their circumstances.
If any customer is having problems in making repayments on a loan facility, they are encouraged to contact their bank to discuss.
If financial hardship exists, banks will offer some assistance options on a case-by-case basis such as extending the loan term to maintain existing repayment levels or switching to a fixed term loan to provide greater certainty.