Analysis of bank funding costs and margins is a little hairy so I thought it might be useful to lay out how things stand.  A lot depends on when you start the comparisons or indeed, whether you are trying to get to the critical point in all of this – the banks margins rather than just an absolute assessment of costs.

Since the middle of 2011, overall bank funding costs have risen sharply mainly due to the surge in wholesale funding costs which make up about 40% of their funding.  But since late 2011, bank funding costs have fallen in absolute terms as the RBA interest rate cuts, lower deposit rates and a very recent lowering in wholesale funding rates have started to impact.

Bank lending rates have fallen too – compared with November, the standard variable mortgage interest rate is around 41 basis points lower.  Other term deposit rates and some business lending rates are also lower.

The net margin – between funding costs and lending rates – has narrowed.  And don’t take my word for it, but the collective wisdom (and data base) of the RBA.

In its Minutes of the February Board meeting it noted and I quote it at length (I have bolded the exciting bits):

“the spreads at which bank debt was issued were significantly higher than in the middle of 2011. The Australian banks had issued sizeable amounts of covered bonds in a number of offshore markets in recent weeks at these higher spreads. Furthermore, the cost of swapping funds raised in offshore markets into Australian dollars had increased in recent months. There had also been two large issues of covered bonds in the Australian market, which had repriced the local bank debt curve significantly higher. Over the same period, Australian banks continued to compete actively for deposits, which resulted in the reductions in most deposit rates not fully matching the recent reductions in the cash rate. Collectively, these developments had increased banks’ overall cost of funding relative to the cash rate and had narrowed the difference between banks’ lending rates and funding costs.”

Enough said?  That’ll do me!