The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, August 9, 2010

Bank spreads above pre-crisis levels

A good little summary from Banking Day this morning:

The Reserve Bank of Australia on Friday added to the pressure on banks to avoid out-of-cycle lending rate rises.

In a note released as part of its regular Statement on Monetary Policy, the RBA calculated that banks’ interest spreads are higher now than in the months before the start of the global financial crisis.

The RBA acknowledges that the banks’ spread – the difference between banks’ average lending rate and the rate at which they fund that lending – has fallen from its mid-2009 peak. But the spread “remains higher than prior to the onset of the global financial turmoil”, it says. An RBA chart shows the current spread as larger than at any time in 2006, 2007 or 2008.

Some banks and analysts have been pointing to the rising cost of wholesale long-term funds in tightening global bond markets, and suggesting it could justify higher bank lending rates “out-of-cycle” – that is, without any rise in official short-term rates from the RBA.

Westpac, which imposed an out-of-cycle rise in December, has reportedly suggested to major shareholders that rising wholesale funding costs are increasing the pressure for further such rises. ANZ last month suggested it could react to rising funding costs by reducing mortgage discounts.

But the RBA says tightening global markets have had only a small effect on overall bank funding costs. And wholesale long-term debt accounts for around a quarter of the major bank’s debt funding, it said.

Meanwhile the cost of deposits – the source of around one-half of the banks’ debt funding – “has been little changed since the beginning of the year” relative to the cash rate. And spreads on short-term wholesale funds remain at about the average for the past year.

Given how much long-term debt banks are expected to roll over between now and the end of 2011, and assuming deposits and short-term funds continue to cost what they do now, the RBA note said that “this would imply a rise in banks’ overall funding costs of around five basis points over the next 18 months or so”.

And even that cost pressure is partly offset by a gradual rise in the prices charged for business loans, the RBA said.

The banks are already under pressure from the Treasurer, Wayne Swan, to restrict themselves to raising rates in step with the Reserve Bank. The Treasurer’s predecessor, Peter Costello, exerted similar pressure on the banks.