Banks fund themselves using a mix of customer deposits, short term wholesale debt, long term wholesale debt and then other instruments like capital, hybrids securities and so on.
For the most part Australian banks, building societies and credit unions are predominately customer deposit funded. It’s one of the reasons our financial system is so stable.
But because the major banks are just so big relative to the size of the economy and the pool of available savings, and because any decent Treasury manager or banking regulator will tell you best practice is to have a mix of funding sources, the big players in Australian banking borrow substantial amounts of money from wholesale financial markets both onshore and offshore.
None more so than the four major banks. And it’s looking like 2016 is going to be a bumper year for the Big 4 on wholesale markets, according to the NAB’s markets credit research team. The biggest in the post-GFC era.
The NAB estimates that:
The Big4 banks of Australia are expected to raise $145bn of new long-term wholesale funding this financial year. Three main factors drive this – the maturation of old debt, asset growth requiring funding and equity capital raisings (which lower the need for bond funding).
The $145bn estimate is primarily driven by $134bn of maturing debt over each bank’s financial year.
Assuming credit/asset growth of 5.3% (which is lower than some economists’ estimates), this would add $21bn to the requirements. Although around $127bn of new loans should be written by the Big4 banks, not all requires wholesale funding, with the majority achieved from increased deposits.
Here’s the chart:
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