Submission to the Inquiry into the Post-Global Financial Crisis Banking Sector Overview

This submission outlines recent developments in the banking sector. It builds on a number of submissions by the Reserve Bank to recent Parliamentary inquiries on similar issues and the analysis in the Reserve Bank's regular publications, including the semi-annual Financial Stability Review and quarterly Statement on Monetary Policy.

The main conclusions are:

• Credit remains available to most borrowers, although on terms which are somewhat tighter than the period immediately prior to the crisis. The one sector where the availability of credit is noticeably more constrained is commercial property. This reflects a combination of factors, including an increase in non-performing loans, the exit of some foreign-owned credit providers, and a lack of appetite by the remaining lenders to increase their exposures to this sector.
• Since the onset of the global financial crisis in 2007, there has been a lift in the whole structure of interest rates in the economy relative to the cash rate. This has reflected higher wholesale credit spreads and increased interest rates on deposits due to increased competition. Higher funding costs for financial intermediaries have led to higher loan rates relative to the cash rate. This realignment of funding costs and lending rates, relative to the cash rate, has occurred at various stages over the past five years. While funding costs and lending rates had largely stabilised relative to the cash rate by the end of 2010, over the past year there has been a further increase in both funding costs and lending rates relative to the cash rate.
• Australian banks continue to record strong profits, although the growth rate of these profits has slowed. Banks' returns on equity remain similar to those of other major companies in Australia as well as those of banks in other countries prior to the global financial crisis.