It was reported today in The Australian that Aussie banks have repriced their loans upwards despite the Reserve Bank's urging against such a move. While the average citizen is going to feel a tad ripped off paying a higher rate on their loans, there is much more going on below the surface that needs consideration.
Certainly when it comes to bank funding and capital management; one has this feeling that the RBA may have a rein of control over interest rate setting in the country but the Aussie banks are very much playing their own game.
"Rates on business loans will rise a larger 30 basis points as the bank (Westpac) seeks to transition customers onto new products ... The industry is facing a lot of pressure with significant increases in wholesale funding costs and increased capital costs."
Wespac joins business rate hikes | The Australia [LINK]
So why is the RBA so enervated when it comes to influencing local bank lending behaviour?
Where do we begin is perhaps a better thought but wholesale funding costs for Australian banks is moving into a two year high position while the local share prices for the same lenders have fallen around 24% on average with National Australia Bank dropping as much as 33% over the last twelve months.
If we look at a typical Australian bank's funding sources, the big four banks (CBA, NAB, ANZ and Westpac) raise about 75% of their capital through wholesale borrowing and wholesale costs are up.
Aussie Banks Dilemma Dashboard [click image to enlarge]
To complicate matters further, credit default swaps on the Aussie banking sector have risen around 100 basis points, also a two year high and then APRA; the local banking regulator has been lifting capital requirements over the last six months which ironically isn't the greatest timing for such an event.
"The difference between what Aussie banks are paying for their funding and what they charge for loans are currently at an all-time low of 2.02% for all the major banks."
Banks Funding Costs Rise | Sydney Morning Herald [LINK]
None of this should come as a surprise to the Australian regulators and only a couple of years ago Phil Coffey, the Deputy Chief Exeuctive Officer presented a paper on Funding Australia's Economic Future with some very key anchor point concerns. He isn't alone with his observations but his remarks in the CEDA speech are noteworthy.
"In these cases of medium and high credit growth, Australia's banking system will face a substantial funding task to meet demand for credit. and given changes to bank's funding environment, the ability of Australia banks to meet such a funding task in wholesale markets is uncertain."
Deputy CEO CEDA Speech | Westpac [ LINK ]
More broadly and another question we should be asking is; has risk in Australian banks risen?
Inherently so, the answer has to be yes. If it becomes more difficult for businesses to fund themselves, if funding liquidity is tighter, risk becomes elevated as a consequence.
All we need now to complete the 'catastrophe picture' is a flood of credit losses on the Risk Weighted Asset side of these bank's balance sheets and things will become really interesting. Going on the news today, the RBA is unlikely to substantially influence such a scenario in a positive way. I am not saying Australian banks are undercapitalised and looking at their pillar III submission reports alongside APRA's capital demands, they aren't. What I am saying is that sector concentration risk and funding structures have pushed these financial institutions into a systemic corner, well capitalised or not, they are fragile as it stands.