Sydney, 1 October, 2008: The Australian Bankers' Association (ABA) said that the Coalition's policy that banks should pass on any Reserve Bank interest rate cuts, regardless of the cost of funds in wholesale markets, is extremely poor policy.

Since August 2007, changes in the Reserve Bank's cash rate have not been a good proxy for changes in banks’ actual cost of funds. Even though the cost of short-term funding is usually heavily influenced by the Reserve Bank’s cash rate changes, other long-term funding sources are not.
 
Banks only collect about half their funding from deposits, the rest is borrowed in these wholesale capital markets, including 25 per cent from overseas.

The cost of these wholesale funds has risen well over increases in the cash rate and, in the last few weeks, have spiked to new record levels. Banks have not yet responded to these recent spikes.

The strength of Australia's banking sector is providing a crucial buffer against the credit crisis throughout the world. Australian consumers and business can still go into their bank to obtain loans for housing or business investment. This is essential if Australia's economic growth and employment is to remain sound.

The Coalition's policy demonstrates a lack of understanding of the funding position of banks, and, if adopted, would potentially weaken the banks and further undermine the position of non-bank lenders at a crucial time for there to be stability in the sector.

For further information:
Heather Wellard
Director, Public Relations
Phone: 02 8298 0411
Mobile: 0409 830 439