Don't blame the fall in deposit growth for higher bank funding costs, the RBA says

(Matt King / Getty Images)
  • A slowdown in deposit growth has been cited as one of the catalysts of higher bank funding costs in Australia.
  • But Chris Kent from the Reserve Bank cited three reasons why a larger credit-deposit gap isn’t to blame.

  • The recent funding problems faced by Australian banks shouldn’t be attributed to falling deposit growth, the RBA says.

    Three of the big four banks implemented out-of-cycle mortgage rate hikes earlier this month, and higher funding costs were cited as one of the main catalysts.

    And in turn, multiple analysts have attributed some of the upward pressure on funding costs to a slowdown in deposit growth.

    As this chart from UBS shows, the gap between deposits received and credit lent out recently rose to an all-time high:

    The argument goes that if banks can’t rely on deposits to fund credit growth, they have to turn to other sources of funding such short-term debt markets, which in turn pushes prices up.

    At the aggregate level, deposits make up around 60% of the funding mix for Australian banks.

    But in a speech today about domestic money supply, the RBA’s Chris Kent poured cold water on the idea that slower deposit growth was driving an increase in the cost of capital.

    Historically, he said there had been many instances where credit growth outpaced deposit growth.

    The current credit-deposit gap is a little different from recent history, in that credit growth is slowing amid the housing downturn, but deposit growth is slowing faster.

    UBS said the slowdown has been caused partly by a decline in the household savings rate. Earlier this month, Q2 GDP data showed the household savings rate fell to 1% — the lowest level since December 2007.

    But looking back over the last two decades, Kent said there were numerous examples where a credit-deposit gap was evident, however “short-term money markets were benign”.

    In addition, he said it’s worth viewing the slowdown in deposits within the context of the banks’ overall asset mix.

    “Loans are not the only assets on banks’ balance sheets,” he said. And in recent quarters, growth in other assets has declined sharply.

    As a result, the growth in total assets has declined at a faster rate than both credit and deposits:

    Reserve Bank of Australia

    Lastly, Kent said that if the deposit shortage really was a serious problem, then it stands to reason that banks would increase deposit rates to build market share.

    But that hasn’t happened. Instead, “retail deposit rates have been flat to down over the past year”.

    Reserve Bank of Australia

    “In short, there is little evidence that there is any relationship between the slowing of deposit growth and recent funding pressures in short-term money markets,” Kent said.

    Higher bank funding costs — which were the talk of local markets in late July — may come back into focus at the end of this month, as banks look to lock in funding prior to quarter-end.

    A full version of Kent’s speech can be found here.

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