The major banks have just had S&P confirm that their AA- credit ratings rely crucially on support from Australian taxpayers in extraordinary circumstances. This was a key consideration for S&P in not downgrading them further. The Aussie credit default swap index, which is one measure of funding costs, has actually been falling over the last couple of weeks. All the major banks have reported healthy net interest margins, and they are having no trouble attracting deposits, which account for 60% of their funding.
It would be a massive embarrassment to the RBA and the Government if the major banks ignored this rate cut in the name of margin expansion. I don't expect it to happen, but I did flag some time ago that this was a big risk of cutting rates in December at a time when the economy was tracking along fine--better than fine it turns out today--and before we had more information/visibility on what is happening in Europe.
While the major banks' wholesale funding costs may have edged up a bit, there is no evidence their retail deposit funding has become more expensive. If anything, retail funding costs have been declining.
To waste an entire rate cut on major bank margin expansion would be a policy error and a direct wealth transfer from all Australians with borrowings to the major bank executive teams and shareholders. Fingers crossed that the banks do the right thing!
