Submissions – Handout and Supplementary Information Prepared for the House of Representatives Standing Committee on Economics Major Bank Funding Developments

The handout was prepared to accompany the Governor's Opening Statement.

The supplementary information was prepared following a request from the Economics Committee at its hearing on 22 September 2016.

Handout

Net Interest Margin

• Banks' net interest margin is the difference between interest earned and interest paid, as a share of interest-earning assets.
• Banks' net interest margin fell between the early 1990s and the mid 2000s.
• The net interest margin has been little changed over the past decade.

Lending and Funding Rates

• Another measure is the difference between the average interest rate on loans and the average interest rate on debt liabilities.
• This implied spread has generally moved sideways for much of the past decade, but has risen over the past two years.

Liquid Assets

• The different patterns in the two measures above primarily reflect the fact that only the net interest margin measure includes interest-earning securities.
• These securities, which earn lower returns than loans, have increased as a share of the balance sheet over recent years.

Banks' Capital Ratios

• Major banks have increased their equity over the past year. Equity is a more costly form of funding.

Return on Equity

• The major banks' return on equity has averaged around 15 per cent over the past two decades.
• It is similar to the return on equity for Canadian banks, but higher than in the United States, Japan and Europe.

Variable Interest Rates

• The spread between banks' mortgage rates and the cash rate declined significantly in the 1990s, but moved higher by nearly two percentage points following the global financial crisis (GFC).
• The average mortgage rate actually paid has not risen by as much as the standard variable rate (SVR) since the GFC.
• The spread between the average interest rate paid by small businesses and the cash rate has increased by more than the spread on housing rates, reflecting a repricing of credit risk.

Long Term Debt Interest Rates

• During the GFC, the cost of new long-term debt rose sharply.
• The average spread on long-term debt outstanding is currently more than 1 percentage point higher than it was prior to the GFC.
• The cost of new long-term debt remains lower than the cost of outstanding long-term debt.

Deposit Interest Rates

• Average interest rates on deposits have increased by around 2 percentage points relative to the cash rate since the GFC.

Short-term Debt Interest Rates

• The cost of short-term debt relative to the cash rate has been less variable than the cost of long-term debt relative to the cash rate.
• The spread between the cost of short-term debt and the market's expected cash rate (OIS – overnight index swap rate) has also been relatively stable over a long period of time.

Funding Composition

• The relative increase in deposit rates partly reflects banks' higher demand for this more stable form of funding.

Variable Housing Interest Rates

• The spread between the benchmark SVRs and the lowest available advertised rates has increased in recent years.
• The difference reflects both advertised and unadvertised discounts. It is not unusual for the discounts to be up to 1½ percentage points.
• Changes in discounts only affect new borrowers (and not the existing stock of mortgages).

Refinancing Approvals

• Households have responded to increased discounting by refinancing more frequently.

Cash Rate and Funding Costs

• The RBA cash rate remains the main driver of bank funding costs, although the funding mix and spreads also change through time.

Advertised Term Deposit Rates

• Interest rates on term deposits with maturities of 1-3 years have increased this year, although these account for less than 2 per cent of bank funding.
• Interest rates on term deposits with maturities of 1, 3 and 6 months have declined recently.

Supplementary Information

Graph S1: Large Banks' Return on Equity

• The major Australian banks' return on equity has averaged around 15 per cent over the past decade.
• It is similar to the return on equity for large Canadian banks, but higher than in the United States, Japan and Europe.

Graph S2: Banking System Concentration

• Data on banking system concentration are compiled from multiple sources and on different bases in different countries. All estimates shown focus on the domestic business of banks operating in each country.
• These data indicate that concentration in the Australian banking system is relatively high but is not unusual compared with that in other countries.