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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 June 2010, bank funding was at $1.47 trillion, an increase of $100 billion or 7.3% over the previous year.
ABS Financial Accounts show that retail deposits constitute 53.5% ($787 billion) of bank funding while wholesale funding (or borrowing by banks) accounts for 46.5% or $685 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 16.6% and 29.9% of banks’ funds respectively.
Of the total $685 billion in banks’ wholesale funding, $407 billion (59%) is sourced from offshore financial markets of which 80% is long-term funding.
|
Banks’ funding – June 2010 |
$bn |
% |
|
Business deposits |
$252.9 |
17.2% |
|
Household deposits |
$534.3 |
36.3% |
|
Deposits – Retail |
$787.2 |
53.5% |
|
|
|
|
|
Wholesale funding |
|
|
|
Bills of Exchange |
$23.9 |
1.6% |
|
One name paper – domestic |
$137.7 |
9.4% |
|
One name paper – offshore |
$83.3 |
5.7% |
|
Short-term funds – total |
$244.9 |
16.6% |
|
|
|
|
|
Bonds – domestic |
$116.6 |
7.9% |
|
Bonds – offshore |
$323.9 |
22.0% |
|
Long-term funds – total |
$440.5 |
29.9% |
|
|
|
|
|
Wholesale funding - total |
$685.4 |
46.5% |
|
|
|
|
|
Total |
$1,472.6 |
100.0% | Source: ABS Financial Accounts
The table below provides a more detailed summary for the past six years.
|
Banks ($bn) |
Deposits |
Bills of Exchange |
One name paper - domestic |
One name paper - offshore |
Bonds - domestic |
Bonds – offshore |
Total debt |
|
Jun-05 |
$420.9 |
$49.6 |
$110.3 |
$54.6 |
$38.0 |
$146.7 |
$820.1 |
|
Jun-06 |
$467.4 |
$50.5 |
$127.6 |
$91.6 |
$53.0 |
$179.3 |
$969.3 |
|
Jun-07 |
$515.7 |
$55.3 |
$136.0 |
$107.3 |
$65.0 |
$205.5 |
$1,084.8 |
|
Jun-08 |
$609.9 |
$45.9 |
$225.4 |
$113.3 |
$80.9 |
$236.8 |
$1,312.3 |
|
Jun-09 |
$720.9 |
$36.8 |
$159.0 |
$68.4 |
$104.3 |
$282.4 |
$1,371.9 |
|
Jun-10 |
$787.2 |
$23.9 |
$137.1 |
$83.3 |
$116.6 |
$323.9 |
$1,472.0 |
|
|
|
|
|
|
|
|
|
|
$-change |
|
|
|
|
|
|
|
|
Jun-06 |
$46.5 |
$0.8 |
$17.3 |
$37.0 |
$15.0 |
$32.6 |
$149.2 |
|
Jun-07 |
$48.3 |
$4.9 |
$8.4 |
$15.7 |
$12.1 |
$26.2 |
$115.5 |
|
Jun-08 |
$94.2 |
-$9.4 |
$89.4 |
$6.1 |
$15.9 |
$31.3 |
$227.5 |
|
Jun-09 |
$111.0 |
-$9.1 |
-$66.4 |
-$44.9 |
$23.4 |
$45.6 |
$59.6 |
|
Jun-10 |
$66.3 |
-$12.9 |
-$22.0 |
$14.9 |
$12.2 |
$41.5 |
$100.1 |
|
|
|
|
|
|
|
|
|
|
%-change |
|
|
|
|
|
|
|
|
Jun-06 |
11.1% |
1.7% |
15.7% |
67.7% |
39.4% |
22.2% |
18.2% |
|
Jun-07 |
10.3% |
9.6% |
6.6% |
17.1% |
22.8% |
14.6% |
11.9% |
|
Jun-08 |
18.3% |
- 17.0% |
65.7% |
5.7% |
24.5% |
15.3% |
21.0% |
|
Jun-09 |
18.2% |
- 19.8% |
- 29.4% |
- 39.7% |
28.9% |
19.3% |
4.5% |
|
Jun-10 |
9.2% |
- 35.1% |
- 13.8% |
21.8% |
11.7% |
14.7% |
7.3% |
|
|
|
|
|
|
|
|
|
|
%-distbn |
|
|
|
|
|
|
|
|
Jun-06 |
48.2% |
5.2% |
13.2% |
9.4% |
5.5% |
18.5% |
100.0% |
|
Jun-07 |
47.5% |
5.1% |
12.5% |
9.9% |
6.0% |
18.9% |
100.0% |
|
Jun-08 |
46.5% |
3.5% |
17.2% |
8.6% |
6.2% |
18.0% |
100.0% |
|
Jun-09 |
52.5% |
2.7% |
11.6% |
5.0% |
7.6% |
20.6% |
100.0% |
|
Jun-10 |
53.5% |
1.6% |
9.3% |
5.7% |
7.9% |
22.0% |
100.0% | Source: ABS Financial Accounts
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.
Source: ABA Financial Accounts
Retail deposits
Deposits constitute the largest source of bank funding now at 53.5% of total funding. Retail deposits (i.e. deposits of households and private businesses) were $787 billion at the end June 2010. This is a 9.2% or $66 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%.
Source: ABS Financial Accounts
The chart below shows the increase in the stock of deposits held by banks over the quarter. Most noticeable are the record increases in deposits, on a quarterly basis, at the height of the global financial crisis. In June quarter 2008, deposits grew by $39 billion, in September quarter 2008 by $40 billion and by $49 billion in December quarter 2008.
Source: ABA Financial Accounts
The strong increases in deposits during 2008 was assisted by high interest rates on term deposits, in particular, banks offered attractive ‘special’ rates on term deposits with the average as high as 7.95% in July 2008. There were instances where these rates were above 8.00%.
Source: RBA
Retail deposits have increased from 44.8% of banks’ funding in March 2008 to 53.5% in June 2010.
At June 2010, household deposits were at $534 billion, making up 68% of retail deposits. Business deposits were at $253 billion or 32% of retail deposits.
Source: ABS Financial Accounts
The chart below shows the spread for the average of interest rates on selected deposit products and term deposits 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. The chart below supports this. It shows that until mid 2008, the average interest rate across selected deposit products was as much as 400 bps below the BBSW. Strong competition for deposits, however, has seen this rapidly change, so much so that the average interest rate on selected deposit products fell to 110 basis points below the BBSW by July 2009. It is now (late 2010) around 180 bps below the BBSW.
In essence, the cost of deposits as a source of bank funding has increased significantly since mid-2008.
Short-term funding
At the end of June 2010, banks’ short-term funding was $244 billion, a fall of $20 billion or 7.6% over the previous year.
The composition of banks’ short-term funds was: bills of exchange (BoE) $23.9 billion, one name paper issued domestically (ONP – domestic) $137.1 billion and one name paper issued offshore (ONP – offshore) $83.3 billion..
|
Banks ($bn) |
Bills of Exchange |
One name paper - domestic |
One name paper - offshore |
Total Short-term |
|
Jun-05 |
$49.6 |
$110.3 |
$54.6 |
$214.5 |
|
Jun-06 |
$50.5 |
$127.6 |
$91.6 |
$269.6 |
|
Jun-07 |
$55.3 |
$136.0 |
$107.3 |
$298.6 |
|
Jun-08 |
$45.9 |
$225.4 |
$113.3 |
$384.7 |
|
Jun-09 |
$36.8 |
$159.0 |
$68.4 |
$264.3 |
|
Jun-10 |
$23.9 |
$137.1 |
$83.3 |
$244.3 |
|
|
|
|
|
|
|
$-change |
|
|
|
|
|
Jun-06 |
$0.8 |
$17.3 |
$37.0 |
$55.1 |
|
Jun-07 |
$4.9 |
$8.4 |
$15.7 |
$29.0 |
|
Jun-08 |
-$9.4 |
$89.4 |
$6.1 |
$86.1 |
|
Jun-09 |
-$9.1 |
-$66.4 |
-$44.9 |
-$120.4 |
|
Jun-10 |
-$12.9 |
-$22.0 |
$14.9 |
-$20.0 |
|
|
|
|
|
|
|
%-change |
|
|
|
|
|
Jun-06 |
1.7% |
15.7% |
67.7% |
25.7% |
|
Jun-07 |
9.6% |
6.6% |
17.1% |
10.7% |
|
Jun-08 |
- 17.0% |
65.7% |
5.7% |
28.8% |
|
Jun-09 |
- 19.8% |
- 29.4% |
- 39.7% |
- 31.3% |
|
Jun-10 |
- 35.1% |
- 13.8% |
21.8% |
- 7.6% |
|
|
|
|
|
|
|
%-distbn |
|
|
|
|
|
Jun-06 |
18.7% |
47.3% |
34.0% |
100.0% |
|
Jun-07 |
18.5% |
45.6% |
35.9% |
100.0% |
|
Jun-08 |
11.9% |
58.6% |
29.5% |
100.0% |
|
Jun-09 |
13.9% |
60.2% |
25.9% |
100.0% |
|
Jun-10 |
9.8% |
56.1% |
34.1% |
100.0% | Source: ABS Financial Accounts Source: ABS Financial Accounts
There has been a significant reduction in the issuance of one name paper over the past two years (since the height of the global financial crisis). This includes a net reduction of $88.4 billion (39%) in domestic issuance and a net reduction of $30 billion (26%) in offshore issuance of one name paper over the past two years. This reflects the disruption in short-term funding markets as well as a move by banks to seek a greater proportion of their funds via deposits and longer term issuance.
Source: ABS Financial Accounts
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 during August 2010 has averaged 24 basis points or about three times higher than pre-GFC levels.
Long-term funding
At the end of June 2010, banks’ long-term funding was $440.5 billion, an increase of 13.9% or $53.7 billion over the previous year.
|
Banks ($bn) |
Bonds - domestic |
Bonds – offshore |
Total debt |
|
Jun-05 |
$38.0 |
$146.7 |
$184.7 |
|
Jun-06 |
$53.0 |
$179.3 |
$232.2 |
|
Jun-07 |
$65.0 |
$205.5 |
$270.5 |
|
Jun-08 |
$80.9 |
$236.8 |
$317.7 |
|
Jun-09 |
$104.3 |
$282.4 |
$386.8 |
|
Jun-10 |
$116.6 |
$323.9 |
$440.5 |
|
|
|
|
|
|
$-change |
|
|
|
|
Jun-06 |
$15.0 |
$32.6 |
$47.6 |
|
Jun-07 |
$12.1 |
$26.2 |
$38.2 |
|
Jun-08 |
$15.9 |
$31.3 |
$47.2 |
|
Jun-09 |
$23.4 |
$45.6 |
$69.0 |
|
Jun-10 |
$12.2 |
$41.5 |
$53.7 |
|
|
|
|
|
|
%-change |
|
|
|
|
Jun-06 |
39.4% |
22.2% |
25.8% |
|
Jun-07 |
22.8% |
14.6% |
16.5% |
|
Jun-08 |
24.5% |
15.3% |
17.5% |
|
Jun-09 |
28.9% |
19.3% |
21.7% |
|
Jun-10 |
11.7% |
14.7% |
13.9% |
|
|
|
|
|
|
%-distbn |
|
|
|
|
Jun-06 |
22.8% |
77.2% |
100.0% |
|
Jun-07 |
24.0% |
76.0% |
100.0% |
|
Jun-08 |
25.5% |
74.5% |
100.0% |
|
Jun-09 |
27.0% |
73.0% |
100.0% |
|
Jun-10 |
26.5% |
73.5% |
100.0% | Source: ABS Financial Accounts
The composition of banks’ long-term funds at the end of June 2010 was: bonds issued domestically $116.6 billion (26.5%) and bonds issued offshore $323.9 billion (73.5%).
Source: ABS Financial Accounts
Pricing for banks long-term issuance remains about 100 bps above swap (August 2010) for three year terms. These spreads are about 8 times higher than pre-GFC levels. 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.
The data above show the level of long term debt outstanding, however, it is useful to look at the issuance of bonds on an annual and monthly basis as presented in the charts below.
In 2006, bond issuance was $85 billion, falling to $61 billion in 2007. The initial impact of the global financial crisis impacted on issuance in late 2007. This lower level of issuance in 2007, resulting mainly from very low issuance in the last two months of 2007, was redressed in early 2008 where $38.7 billion was issued in the first two months of 2008 (as compared with $18.7 billion in Jan/Feb 2006 and $13.1 billion in Jan/Feb 2007).
At the peak of the global financial crisis from September 2008 to November 2008, bond issuance fell to $3.5 billion (over this three month period), the lowest level for any three month period for the five year period shown. The following three months, from December 2008 to February 2009 saw a record $73 billion of bond issuance with two-thirds (67%) of this being offshore issuance. The announcement of the government guarantee in October 2008 provided support to bond issuance programs during this time with the first guaranteed issuances in December 2008.
Monthly bond issuance remained high throughout 2009 as banks brought forward their funding needs to ensure that their balance sheets were stable and strong within a difficult funding environment.
Other factors also impacted on the very high level ($228 billion) of bond issuance in 2009. That is, disruption in the short-term capital markets saw financial institutions move to longer term issuance. The closure of securitisation markets meant that bond issuance replaced securitisation programs. This, of course, has affected the data since the onset of the global financial crisis. Bank mergers and takeovers added to the overall level of bond issuance as the securitised assets of the acquired banks were replaced with bond issuance.
Source: RBA
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. To October 2010, institutions participating in the scheme have paid $2.1 billion to the Australian Government and will pay $5.5 billion by the end of the scheme.
Total guaranteed debt issuance stands at $144.9 billion as at the end of October 2010.
Note that on 7 February 2010, the Australian government announced the removal of the wholesale funding guarantee.
Source: Australian Treasury
Summary of banks' wholesale funding
ABS Financial Accounts at the end of June 2010 show that wholesale funding makes up around 47% or $684.8 billion of bank funding. This is made up of $224.9 billion in short-term funding and $440.5 billion in long-term funding.
Short-term funding, excluding bills of exchange (which are not classified by domestic or offshore) is 62% domestic and 38% offshore while for long-term funding this is 26% domestic and 74% offshore. .
|
Banks ($bn) |
Bills of Exchange |
One name paper - domestic |
One name paper - offshore |
Bonds - domestic |
Bonds – offshore |
Total wholesale |
|
Jun-05 |
$49.6 |
$110.3 |
$54.6 |
$38.0 |
$146.7 |
$399.2 |
|
Jun-06 |
$50.5 |
$127.6 |
$91.6 |
$53.0 |
$179.3 |
$501.9 |
|
Jun-07 |
$55.3 |
$136.0 |
$107.3 |
$65.0 |
$205.5 |
$569.1 |
|
Jun-08 |
$45.9 |
$225.4 |
$113.3 |
$80.9 |
$236.8 |
$702.4 |
|
Jun-09 |
$36.8 |
$159.0 |
$68.4 |
$104.3 |
$282.4 |
$651.0 |
|
Jun-10 |
$23.9 |
$137.1 |
$83.3 |
$116.6 |
$323.9 |
$684.8 |
|
|
|
|
|
|
|
|
|
$-change |
|
|
|
|
|
|
|
Jun-06 |
$0.8 |
$17.3 |
$37.0 |
$15.0 |
$32.6 |
$102.7 |
|
Jun-07 |
$4.9 |
$8.4 |
$15.7 |
$12.1 |
$26.2 |
$67.2 |
|
Jun-08 |
-$9.4 |
$89.4 |
$6.1 |
$15.9 |
$31.3 |
$133.3 |
|
Jun-09 |
-$9.1 |
-$66.4 |
-$44.9 |
$23.4 |
$45.6 |
-$51.4 |
|
Jun-10 |
-$12.9 |
-$22.0 |
$14.9 |
$12.2 |
$41.5 |
$33.8 |
|
|
|
|
|
|
|
|
|
%-change |
|
|
|
|
|
|
|
Jun-06 |
1.7% |
15.7% |
67.7% |
39.4% |
22.2% |
25.7% |
|
Jun-07 |
9.6% |
6.6% |
17.1% |
22.8% |
14.6% |
13.4% |
|
Jun-08 |
- 17.0% |
65.7% |
5.7% |
24.5% |
15.3% |
23.4% |
|
Jun-09 |
- 19.8% |
- 29.4% |
- 39.7% |
28.9% |
19.3% |
- 7.3% |
|
Jun-10 |
- 35.1% |
- 13.8% |
21.8% |
11.7% |
14.7% |
5.2% |
|
|
|
|
|
|
|
|
|
%-distbn |
|
|
|
|
|
|
|
Jun-06 |
10.1% |
25.4% |
18.2% |
10.6% |
35.7% |
100.0% |
|
Jun-07 |
9.7% |
23.9% |
18.8% |
11.4% |
36.1% |
100.0% |
|
Jun-08 |
6.5% |
32.1% |
16.1% |
11.5% |
33.7% |
100.0% |
|
Jun-09 |
5.7% |
24.4% |
10.5% |
16.0% |
43.4% |
100.0% |
|
Jun-10 |
3.5% |
20.0% |
12.2% |
17.0% |
47.3% |
100.0% | Source: ABS Financial Accounts
Almost half (46.3%) of all wholesale funding for banks is from long-term debt (bonds) issues offshore.
Updated November 2010
|