RDP 2013-15: Trends in the Funding and Lending Behaviour of Australian Banks 5. Conclusion

This paper examines some of the factors that shaped the Australian banking system over the 1990s and early 2000s, as well as a number of new forces that have come into play since the onset of the global financial crisis.

On the funding side, Australian banks experienced a trend decline in deposit funding from the late 1970s until the financial crisis. Deregulation and the move to low inflation allowed households to increase their leverage, while a number of institutional and bank-specific factors also contributed to a reduction in the deposit share of funding. The gap was funded by wholesale debt, with a larger share of debt sourced from offshore than was the case for other comparable banking systems. The financial crisis has led to a reassessment of the trade-off between the advantages and disadvantages of wholesale funding, particularly short-term funding, and this has contributed to a steady increase in the share of funding coming from deposits. This adjustment has contributed to the increase in funding costs, and consequently to higher lending rates relative to the cash rate over this period.

Lending rates have also increased for some loans as a result of a reassessment of how risk should be priced. Banks appear to have become more discriminating in their use of discounts, which have been a prominent feature of Australia's housing loan market. Perhaps the most significant change to the asset side of balance sheets has been an increase in the share of liquid assets. On the one hand, this has led to lower profitability due to the lower rate of return on liquid assets. On the other hand, other funding costs should fall given that the institutions are less vulnerable to liquidity risk. In aggregate, however, there has been little change to the asset side of banks' balance sheets that are still dominated by loans to households and businesses at variable rates, which can be altered at the discretion of the institution.

In combination, these factors, and the relative stability of the ratio of household debt to income in recent years, suggest that the outlook for credit growth may be more subdued than in the period leading up to the global financial crisis. Banks have responded to this prospect by trying to increase their efficiency and, in some cases, diversifying their activities further. Other forces operating in the wider Australian financial system – but not covered in this discussion of the banking sector – will also have an impact on the banking system. For example, should the role of superannuation funds evolve or a deep and liquid corporate bond market become established in Australia, there would be implications for the Australian banking system (Davis 2013; Maddock and Munckton 2013). These issues are left to other researchers.

The Australian banking sector has been shaped by many different forces and, in general, it has been able to adapt smoothly. A part of this success can be attributed to the fact that the Australian financial system has evolved to have deep and liquid markets for instruments that can be used to hedge many of the financial risks banks face, and there is a strong prudential supervision regime.