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Bank Funding
The data used below are sourced primarily from the ABS Financial Accounts unless otherwise stated.
In order to support their lending, banks source their funds from:
- customer deposits,
- wholesale markets (domestic and international)
For most of the last decade, banks’ funding sources and the cost of funding has been relatively predictable.
Movements in the Reserve Bank’s cash rate have generally closely approximated changes in total bank funding costs. Since the global financial crisis began in late 2007, the Reserve Bank’s cash rate has not been an accurate indicator of changes in bank funding costs.
The price that banks pay for their funds is influenced by many factors. These include changes in the official cash rate, competition, international events, the credit rating of the bank and the supply of wholesale funds.
Source of funds
At the end of September 2009, bank funding was at $1.4 trillion, a very small increase of $3.6 billion or 0.3% over the previous year.
ABS Financial Accounts show that retail deposits constitute 52% ($734 billion) of bank funding while wholesale funding (or borrowing by banks) accounts for 48% or $673 billion.
Wholesale funding can be further disaggregated into short-term funding (of less than 12 months duration) and long-term funding (of greater than 12 months duration), making up 21% and 27% of banks’ funds respectively.
Of the total $673 billion in banks’ wholesale funding, $366 billion (54%) is sourced from offshore financial markets of which 80% is long-term funding.
|
Banks’ funding – September 2009 |
$bn |
% |
|
Business deposits |
$227 |
16% |
|
Household deposits |
$507 |
36% |
|
Deposits - Retail |
$734 |
52% |
|
|
|
|
|
Wholesale funding |
|
|
|
Bills of Exchange |
$58 |
4% |
|
One name paper - domestic |
$156 |
11% |
|
One name paper - offshore |
$75 |
5% |
|
Short-term funds - total |
$289 |
21% |
|
|
|
|
|
Bonds - domestic |
$93 |
7% |
|
Bonds – offshore |
$291 |
21% |
|
Long-term funds - total |
$384 |
27% |
|
|
|
|
|
Wholesale funding - total |
$673 |
48% |
|
|
|
|
|
Total |
$1,406 |
100% |
The table below provides a more detailed summary for the past six years.
|
Banks ($bn) |
Deposits |
Bills of Exchange |
One name paper - domestic |
One name paper - offshore |
Bonds - domestic |
Bonds – offshore |
Total debt |
|
Sep-04 |
$401.0 |
$48.5 |
$109.6 |
$55.9 |
$27.0 |
$131.7 |
$773.7 |
|
Sep-05 |
$434.0 |
$53.8 |
$111.4 |
$58.0 |
$43.5 |
$146.5 |
$847.2 |
|
Sep-06 |
$488.0 |
$56.4 |
$132.4 |
$100.9 |
$54.1 |
$191.0 |
$1,022.8 |
|
Sep-07 |
$533.0 |
$57.8 |
$218.0 |
$105.3 |
$64.3 |
$210.1 |
$1,188.5 |
|
Sep-08 |
$649.0 |
$61.8 |
$237.0 |
$108.2 |
$84.3 |
$262.6 |
$1,402.9 |
|
Sep-09 |
$734.0 |
$58.4 |
$155.9 |
$74.5 |
$92.5 |
$291.2 |
$1,406.5 |
|
|
|
|
|
|
|
|
|
|
$-change |
|
|
|
|
|
|
|
|
Sep-05 |
$33.0 |
$5.3 |
$1.8 |
$2.1 |
$16.5 |
$14.8 |
$73.5 |
|
Sep-06 |
$54.0 |
$2.6 |
$21.0 |
$42.9 |
$10.6 |
$44.5 |
$175.6 |
|
Sep-07 |
$45.0 |
$1.4 |
$85.6 |
$4.4 |
$10.2 |
$19.1 |
$165.7 |
|
Sep-08 |
$116.0 |
$4.0 |
$19.0 |
$2.9 |
$20.0 |
$52.5 |
$214.4 |
|
Sep-09 |
$85.0 |
-$3.4 |
-$81.1 |
-$33.7 |
$8.2 |
$28.6 |
$3.6 |
|
|
|
|
|
|
|
|
|
|
%-change |
|
|
|
|
|
|
|
|
Sep-05 |
8.2% |
10.9% |
1.6% |
3.8% |
61.1% |
11.2% |
9.5% |
|
Sep-06 |
12.4% |
4.8% |
18.9% |
74.0% |
24.4% |
30.4% |
20.7% |
|
Sep-07 |
9.2% |
2.5% |
64.7% |
4.4% |
18.9% |
10.0% |
16.2% |
|
Sep-08 |
21.8% |
6.9% |
8.7% |
2.8% |
31.1% |
25.0% |
18.0% |
|
Sep-09 |
13.1% |
-5.5% |
-34.2% |
-31.1% |
9.7% |
10.9% |
0.3% |
|
|
|
|
|
|
|
|
|
|
%-distbn |
|
|
|
|
|
|
|
|
Sep-05 |
51.2% |
6.4% |
13.1% |
6.8% |
5.1% |
17.3% |
100.0% |
|
Sep-06 |
47.7% |
5.5% |
12.9% |
9.9% |
5.3% |
18.7% |
100.0% |
|
Sep-07 |
44.8% |
4.9% |
18.3% |
8.9% |
5.4% |
17.7% |
100.0% |
|
Sep-08 |
46.3% |
4.4% |
16.9% |
7.7% |
6.0% |
18.7% |
100.0% |
|
Sep-09 |
52.2% |
4.2% |
11.1% |
5.3% |
6.6% |
20.7% |
100.0% |
The fall in short-term funding levels is noticeable over December quarter 2008 and March quarter 2009. The disruption to short-term capital markets as a result of the global financial crisis resulted in the level of short-term wholesale funds falling below the level of long-term capital funds in December quarter 2008. This is evident in the chart below.
Retail deposits
Deposits constitute the largest source of bank funding now at 52% of total funding. Retail deposits (i.e. deposits of households and private businesses) were $734 billion at the end September 2009. This is a 13% or $85 billion increase over the past year.
In late 2008/early 2009, bank deposits had been growing at the fastest annual pace in the life of the data series (i.e. 20 years), at almost 25%.
Retail deposits have increased from 44% of banks’ funding in March 2008 to 52% in September 2009.
At September 2009, household deposits were at $506.6 billion, making up 69% of retail deposits. Business deposits were at $227.2 billion or 31% of retail deposits.
The chart below shows the spread for the average of interest rates on selected interest-bearing deposit products (as released by the Reserve Bank of Australia) to the 90 day BBSW. This is an indicative measure of the margin or spread on interest-bearing deposits, not an actual measure.
The BBSW is a benchmark for the cost of banks funds. As such, it would be expected that interest rates on deposit products would normally be priced below the BBSW. In fact, the chart below supports this. It shows that until mid 2008, the average interest rate across selected interest-bearing deposits was just over 200 bps (or 2%) below the BBSW. Strong competition for deposits, however, has seen this rapidly change, so much so that the average interest rate on selected interest-bearing deposits has exceeded the BBSW over late 2009.
Short-term funding
At the end of September 2009, banks’ short-term funding was $289 billion, a fall of $118.2 billion or 29% over the previous year.
The composition of banks’ short-term funds was: bills of exchange (BoE) $58.4 billion, one name paper issued domestically (ONP – domestic) $155.9 billion and one name paper issued offshore (ONP – offshore) $74.5 billion.
|
Banks ($bn) |
Bills of Exchange |
One name paper - domestic |
One name paper - offshore |
Total short-term funds |
|
Sep-04 |
$48.5 |
$109.6 |
$55.9 |
$214.0 |
|
Sep-05 |
$53.8 |
$111.4 |
$58.0 |
$223.2 |
|
Sep-06 |
$56.4 |
$132.4 |
$100.9 |
$289.7 |
|
Sep-07 |
$57.8 |
$218.0 |
$105.3 |
$381.1 |
|
Sep-08 |
$61.8 |
$237.0 |
$108.2 |
$407.0 |
|
Sep-09 |
$58.4 |
$155.9 |
$74.5 |
$288.8 |
|
|
|
|
|
|
|
$-change |
|
|
|
|
|
Sep-05 |
$5.3 |
$1.8 |
$2.1 |
$9.2 |
|
Sep-06 |
$2.6 |
$21.0 |
$42.9 |
$66.5 |
|
Sep-07 |
$1.4 |
$85.6 |
$4.4 |
$91.4 |
|
Sep-08 |
$4.0 |
$19.0 |
$2.9 |
$25.9 |
|
Sep-09 |
-$3.4 |
-$81.1 |
-$33.7 |
-$118.2 |
|
|
|
|
|
|
|
%-change |
|
|
|
|
|
Sep-05 |
10.9% |
1.6% |
3.8% |
4.3% |
|
Sep-06 |
4.8% |
18.9% |
74.0% |
29.8% |
|
Sep-07 |
2.5% |
64.7% |
4.4% |
31.5% |
|
Sep-08 |
6.9% |
8.7% |
2.8% |
6.8% |
|
Sep-09 |
-5.5% |
-34.2% |
-31.1% |
-29.0% | 
There has been a significant reduction in the issuance of one name paper over the past year, a reduction of $81.1 billion (34%) in domestic issuance and $33.7 billion (31%) in offshore issuance of one name paper. This reflects the disruption in short-term funding markets.
Issuance of one name paper is two-thirds domestic and one-third offshore.
The 90-day bank bill swap rate (90-day BBSW) is commonly used as the market benchmark for banks’ funding costs. The divergence (i.e. spread) of the 90-day BBSW from a market indicator of the cash rate can indicate changes to the banks’ short-term funding costs. This ‘market’ indicator of the official cash rate is called the 90-day Overnight Index Swap rate (90-day OIS).
The chart clearly shows that the cost of short-term funds (based on the BBSW to OIS spread) has been volatile since August 2007. Prior to August 2007, the cost above the 90-day OIS was only about 8-10 basis points. The spread is now (January 2010) around 20 bps.
Long-term funding
At the end of September 2009, banks’ long-term funding was $384 billion, an increase of 10.6% or $36.8 billion over the previous year.
|
Banks ($bn) |
Bonds - domestic |
Bonds – offshore |
Total long-term funds |
|
Sep-04 |
$27.0 |
$131.7 |
$158.7 |
|
Sep-05 |
$43.5 |
$146.5 |
$190.0 |
|
Sep-06 |
$54.1 |
$191.0 |
$245.1 |
|
Sep-07 |
$64.3 |
$210.1 |
$274.4 |
|
Sep-08 |
$84.3 |
$262.6 |
$346.9 |
|
Sep-09 |
$92.5 |
$291.2 |
$383.7 |
|
|
|
|
|
|
$-change |
|
|
|
|
Sep-05 |
$16.5 |
$14.8 |
$31.3 |
|
Sep-06 |
$10.6 |
$44.5 |
$55.1 |
|
Sep-07 |
$10.2 |
$19.1 |
$29.3 |
|
Sep-08 |
$20.0 |
$52.5 |
$72.5 |
|
Sep-09 |
$8.2 |
$28.6 |
$36.8 |
|
|
|
|
|
|
%-change |
|
|
|
|
Sep-05 |
61.1% |
11.2% |
19.7% |
|
Sep-06 |
24.4% |
30.4% |
29.0% |
|
Sep-07 |
18.9% |
10.0% |
12.0% |
|
Sep-08 |
31.1% |
25.0% |
26.4% |
|
Sep-09 |
9.7% |
10.9% |
10.6% |
The composition of banks’ long-term funds at the end of September 2009 was: bonds issued domestically $92.5 billion (24%) and bonds issued offshore $291.2 billion (76%).
Recent pricing for banks long-term issuance remains about 120 bps above swap (January 2010) for three year terms. The chart below shows that prior to the global financial crisis, banks could raise three-year term funding at around 12-15 basis points above the benchmark rate. Spreads averaged as high as 242 bps in March 2009.
Government guarantee of wholesale funding
In October 2008, the Australian Government announced guarantee arrangements for wholesale borrowing. Given that these guarantees were being implemented in a number of other countries - as a result of huge disruption to financial markets at that time - it was important that Australia also had such a system in place to ensure continued and smooth access to capital markets.
The guarantee fees provide an ongoing monthly revenue stream for government over the life of the debt issuance, with some maturities out to 2014. So far, for institutions participating in the scheme, guarantee fees of $1.1 billion have been paid to the Australian Government.
Total guaranteed debt issuance stands at $153.0 billion as at the end of December 2009.
Note that on 7 February 2010, the Australian government announced the removal of the wholesale funding guarantee.
Summary of banks' wholesale funding
ABS Financial Accounts at the end of September 2009 show that wholesale funding makes up around 47% or $672.5 billion of bank funding. This is made up of $289 billion in short-term funding and $384 billion in long-term funding.
Short-term funding, excluding bills of exchange (which are not classified by domestic or offshore) is 68% domestic and 32% offshore while for long-term funding this is 24% domestic and 76% offshore.
|
Banks ($bn) |
Bills of Exchange |
One name paper - domestic |
One name paper - offshore |
Bonds - domestic |
Bonds – offshore |
Total wholesale |
|
Sep-04 |
$48.5 |
$109.6 |
$55.9 |
$27.0 |
$131.7 |
$372.7 |
|
Sep-05 |
$53.8 |
$111.4 |
$58.0 |
$43.5 |
$146.5 |
$413.2 |
|
Sep-06 |
$56.4 |
$132.4 |
$100.9 |
$54.1 |
$191.0 |
$534.8 |
|
Sep-07 |
$57.8 |
$218.0 |
$105.3 |
$64.3 |
$210.1 |
$655.5 |
|
Sep-08 |
$61.8 |
$237.0 |
$108.2 |
$84.3 |
$262.6 |
$753.9 |
|
Sep-09 |
$58.4 |
$155.9 |
$74.5 |
$92.5 |
$291.2 |
$672.5 |
|
|
|
|
|
|
|
|
|
$-change |
|
|
|
|
|
|
|
Sep-05 |
$5.3 |
$1.8 |
$2.1 |
$16.5 |
$14.8 |
$40.5 |
|
Sep-06 |
$2.6 |
$21.0 |
$42.9 |
$10.6 |
$44.5 |
$121.6 |
|
Sep-07 |
$1.4 |
$85.6 |
$4.4 |
$10.2 |
$19.1 |
$120.7 |
|
Sep-08 |
$4.0 |
$19.0 |
$2.9 |
$20.0 |
$52.5 |
$98.4 |
|
Sep-09 |
-$3.4 |
-$81.1 |
-$33.7 |
$8.2 |
$28.6 |
-$81.4 |
|
|
|
|
|
|
|
|
|
%-change |
|
|
|
|
|
|
|
Sep-05 |
10.9% |
1.6% |
3.8% |
61.1% |
11.2% |
10.9% |
|
Sep-06 |
4.8% |
18.9% |
74.0% |
24.4% |
30.4% |
29.4% |
|
Sep-07 |
2.5% |
64.7% |
4.4% |
18.9% |
10.0% |
22.6% |
|
Sep-08 |
6.9% |
8.7% |
2.8% |
31.1% |
25.0% |
15.0% |
|
Sep-09 |
-5.5% |
-34.2% |
-31.1% |
9.7% |
10.9% |
-10.8% |
|
|
|
|
|
|
|
|
|
%-distbn |
|
|
|
|
|
|
|
Sep-05 |
13.0% |
27.0% |
14.0% |
10.5% |
35.5% |
100.0% |
|
Sep-06 |
10.5% |
24.8% |
18.9% |
10.1% |
35.7% |
100.0% |
|
Sep-07 |
8.8% |
33.3% |
16.1% |
9.8% |
32.1% |
100.0% |
|
Sep-08 |
8.2% |
31.4% |
14.4% |
11.2% |
34.8% |
100.0% |
|
Sep-09 |
8.7% |
23.2% |
11.1% |
13.8% |
43.3% |
100.0% |
Bonds (i.e. longer term debt) made up 57% of wholesale debt as at September 2009, much higher than the 45%-47% over previous years.
Updated February 2010
|