Do you think the Reserve Bank is trying, very hard, to send a message to politicians, bankers, customers and others demanding that something be "done" about these big banks?
On Monday RBA Governor Glenn Stevens told the first day of the Senate banking inquiry, "Risk has been re-priced since early 2007. All of us are still adjusting to this change and its implications."
Yesterday, the RBA’s head of Financial Markets, Guy Debelle, told a Sydney banking conference, "Having been underpriced for a number of years prior to 2007, risk was rapidly and substantially re-priced as the financial crisis unfolded.
"The re-assessment and the re-pricing of these risks have caused changes in the structure of funding of Australian banks."
Dr Debelle said that, to increase funding, Australian banks had competed aggressively to increase their share of bank deposit funding.
‘‘The average cost of the major banks’ new deposits is now only slightly below the cash rate, whereas prior to the onset of the financial crisis, deposit rates were about 150 basis points below the cash rate.’’
Competition had been strongest for term deposits, and Dr Debelle said, "The average rate on banks’ term deposit specials is currently more than 70 basis points above market rates for debt of equivalent terms.
"‘In the few years prior to the global financial crisis, the average rate was generally about 60 basis points below.
"‘This is notwithstanding the fact that wholesale debt is a liquid tradable instrument whereas a deposit is not.
"One might expect that this liquidity of wholesale debt would result in it being cheaper.
"At the same time as banks have increased the share of deposit funding by around 7 percentage points, the share of longer-term wholesale funding has also increased by a similar amount.(See the graph above).
"This increase in the share of funding sourced from deposits and long-term debt has mirrored a decline in the share of funding sourced from short-term wholesale debt, both from domestic and foreign markets.
"The share of short-term funding has fallen by 10 percentage points over the past three years, a very large change indeed.
"As a result of these changes, the vulnerability of the Australian banking system to any further seizures in global financial markets has decreased.
"But these changes have increased the cost of funding for the banking system as a whole.
"The costs of all forms of funding have risen, and, at the same time, banks have shifted to more expensive sources of funding.
"This shift has reflected market and regulatory pressures following a re-assessment of risk."
Dr Debelle said there had been a significant easing in the pace of credit growth to business since mid-2008.
The decline had prompted business to find money elsewhere, he said.
"In 2009, there was a record level of equity raisings by large businesses that enabled them to repay debt.
"A number of large businesses, particularly in the mining sector, have been able to fund their activities and repay debt from their retained earnings resulting from their strong cash flow.’’
The slowdown in credit growth had eased pressure on banks to increase their funding.
‘‘Part of the explanation for the strong growth in deposits is the increased competition for deposits in the banking system,’’ Dr Debelle said.
‘‘Another part of the explanation reflects the changed nature of the financial flows in the economy.
‘‘If the economy evolves as forecast, it’s quite possible this pattern of deposit growth outstripping credit growth continues and deposits may continue to rise as a share of bank funding."
So reading Mr Stevens comments, the RBA’s submission to the Senate inquiry and then Dr Debelle’s speech yesterday, it’s clear that many bank bashers remain wedded to what happened before the GFC, and have not bothered to inform themselves about life after the big crunch.
Likewise, many small credit-providing and deposit-taking groups in Australia have a similar lack of understanding of the change, or show it by their urgings to Canberra for some sort of preferment, at the public’s expense.
Money is more expensive now and the millions of depositors (who out number mortgage holders) are winners.
Those who have debt, especially housing and credit cards, are the losers, as are the smaller institutions, unless they can find a way of growing larger.
The big banks are ham-fisted, poorly-run outfits with managements at times more interested in how much they earn and their position, rather than customer satisfaction, or explaining to customers the changed rules of the business.
The urge to save more among consumers, has met the high cost of risk/credit, and bank funding costs in all areas have risen as a result, and will remain higher for some time to come.
Get used to it.
