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My question for SME and mid-market business owners: has your bank margin decreased? You are not alone.

An excellent overview of developments in funding costs and lending rates by the Reserve Bank of Australia (RBA) on Bank Funding Costs. A quick summary taken from the RBA’s article:

The monetary policy measures announced by the Reserve Bank in 2020 worked to lower funding costs across the economy and support the provision of credit. As a result, the cash rate and BBSW rates, which are important reference rates for banks’ overall debt funding costs, declined significantly. Banks’ lending rates and funding costs declined alongside these other interest rates, such that average interest spreads were little changed.

This is why;

The basic hypothesis is ‘if major bank Net Interest Margins [NIM] have remained relatively stable, despite the huge influx of cheap RBA provided term funding, then this is evidence of pass through of cheap funding to borrowers. On the surface, and ‘in aggregate’, this appears correct but not what we are seeing from a customers’ perspective.

Our analysis shows that the generous RBA Term Funding Facility is artificially supporting Bank NIMs which would otherwise be reducing due to common ‘low rate environment’ impacts. ‘Headwinds’…as the Banks like to say.

Consider this;

  • At Call deposits were already priced ‘near zero’ pre-COVID. The “funding benefit lost” from the ~65pts of cash rate reduction across this significant source of funds is a strong negative NIM pressure.
  • Fall in capital replicating rates (tractor rates or capital hedges) disclosed by the Banks has further negative NIM pressure. Not-bearing-interest [NBI] portfolios are another material source of funds and add to the “funding benefit lost”.

The question is what has offset these portfolio funding headwinds, if not the ‘free’ money from the RBA TFF?

Daniel Chalmers

About Daniel Chalmers

Dan is the Managing Director at BankEdge. He has a unique end-to-end combination of banking technical valuation skills and client-sales-advisory experience gained over nearly two decades of managing client accounts whilst working in a major Australian bank followed by as an independent banking consultant.