A five-year research project by a senior finance academic into the drivers of bank wholesale funding costs mathematically proves the message banks have been trying to send in recent months: the cash rate does not drive the spreads on their wholesale funding.
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The findings by Simon Cottrell, a former banker and now senior lecturer at the Australian Institute of Business in Adelaide, appear to disprove recent comments by both the Reserve Bank of Australia and Australian Securities and Investments Commission that the cash rate is closely correlated to bank funding costs.
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But Dr Cottrell's paper, which will soon be submitted for publication in the Journal of Banking & Finance, says: "The RBA's cash rate displayed no statistical significance as a driver of wholesale funding spreads and it is these findings that are particularly intriguing given the contrasting views of the Reserve Bank of Australia." Rather, the "statistical evidence suggests the key drivers of Australian bank wholesale funding spreads are the VIX [a volatility index], the 10-year bond yield, the bank bill rate [BBSW] and the exchange rate," the paper says. Banks receive around 40 per cent of their total funding from wholesale markets; the remainder comes from deposits.
Amazed at your ignorance.........Never.
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Sydneyite: RBA sets the price in that market and controls the price completely
So they Control the VIX [a volatility index], the 10-year bond yield, the bank bill rate [BBSW] and the exchange rate? Really.......
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the cash rate does not drive the spreads on their wholesale funding.
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said: "Hopefully Australians understand there is no direct link between changes in the cash rate and what happens to rates on loans and deposits despite some recent, opportunistic commentary to the contrary."
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The RBA cash rate does drive the cost of short-term, overnight loans provided to banks by the RBA. But such loans are "termed out" by banks when they issue debt via domestic and international capital markets in the form of long-term bonds, securitisation and short-term negotiable certificate of deposits and Euro commercial paper
And yet our banks Issue Bonds....................OVERSEAS...........
Again please tell me how Australian Banks do not Borrow money from overseas Capital markets......
Oh wait
Nobody has ever said that local banks do not borrow overseas. But they do this for term (requirements often driven by APRA regulations), and because it's often cheaper. But we are talking about whether (and how) the RBA controls $AU interest rates.
Simon_S
1 Dec 2016, 03:06 PM
So they Control the VIX [a volatility index], the 10-year bond yield, the bank bill rate [BBSW] and the exchange rate? Really.......
I know what the VIX is - do you? Do you know how it is calculated??? What do you think it has to do with $AU interest rates?
As for the 10 year bond yield, the BBSW bank bill rates and so on, as I stated previously, the RBA controls COMPLETELY the overnight cash rate - which is the actual cost of NEW money. All other interest rates, bond yields etc are anchored to this rate, being the shortest term rate available and the actual cost of new $AU money. So therefore the RBA influences these rates via the cash rate. Of course they have other monetary tools available which could increase this influence (eg if they undertook QE activities - buying bonds and other securities etc), if they so desired. But currently RBA only intervenes in the overnight cash/repo market to control the cash rate.
The vast bulk of new and open loans written by Oz banks are variable rate mortgages - the major factor that drives the baseline / wholesale cost of funding the liquidity requirements resulting from writing these loans is the overnight cash rate - set by the RBA. All other factors influence FIXED interest loan rates primarily, and the margin / spread charged in between the base cost of money and the rate charged to the end customer for all loans.
What happens again when this 40% component gets dearer........
1) Banks will reduce amount of o/s borrowing and seek cheaper alternatives locally (if regulations allow) - eg this happenned a few years ago and all the banks chased increased local retail / household deposits to reduce term based o/s funding needs. 2) Wholesale -> retail interest rate spreads may widen a little (subject to competitive pressures though) 3) Main products effected would be fixed rate / term loans - especially those made to the corporate sector 4) Minimal impact to variable mortgage rates - if impact became too great RBA would cut cash rate to keep retail cost of borrowing and lending growth around where they want it
1) Banks will reduce amount of o/s borrowing and seek cheaper alternatives locally (if regulations allow) - eg this happenned a few years ago and all the banks chased increased local retail / household deposits to reduce term based o/s funding needs. 2) Wholesale -> retail interest rate spreads may widen a little (subject to competitive pressures though) 3) Main products effected would be fixed rate / term loans - especially those made to the corporate sector 4) Minimal impact to variable mortgage rates - if impact became too great RBA would cut cash rate to keep actual cost of borrowing around where they want it
Oh so they wont cause Interest Rates to rise here..........
1) Banks will reduce amount of o/s borrowing and seek cheaper alternatives locally (if regulations allow) - eg this happenned a few years ago and all the banks chased increased local retail / household deposits to reduce term based o/s funding needs. 2) Wholesale -> retail interest rate spreads may widen a little (subject to competitive pressures though) 3) Main products effected would be fixed rate / term loans - especially those made to the corporate sector 4) Minimal impact to variable mortgage rates - if impact became too great RBA would cut cash rate to keep retail cost of borrowing and lending growth around where they want it
If w/sale funding costs increase, it puts pressure on bank margins. Secondly, from a business POV, if banks want to source funding domestically, they have source funding with an attractive return. Good for the suburbanites to think more pragmatically at times.
Oh so they wont cause Interest Rates to rise here..........
Oh wait they just went up.......LOL
Every month some term rates rise and some fall.
Get over it.
Terry
1 Dec 2016, 04:15 PM
If w/sale funding costs increase, it puts pressure on bank margins. Secondly, from a business POV, if banks want to source funding domestically, they have source funding with an attractive return. Good for the suburbanites to think more pragmatically at times.
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