The RBA just made it much harder for Australia's big banks to argue why they didn't pass on the full rate cut

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Australia’s major banks are under pressure to explain why they felt they needed to retain so much of the recent RBA cut to the cash rate of 0.25%.

The Commonwealth Bank was first out of the blocks after the RBA’s rate cut announcement Tuesday. It only passed on a little more than half of the RBA 0.25% cut with a 0.13% reduction in home loan rates. But it emphasised that while it wasn’t passing on all of the RBA’s rate cut, at least it had lifted some term deposit rates.

“Today we’ve reduced our mortgage rates to a record low while increasing term deposit rates to provide an opportunity to the millions of Australians who rely on savings”, the bank said.

ANZ CEO Shayne Elliott said it was just a case of the banks better explaining themselves.

“We must to do better as an industry in explaining these dilemmas and the drivers of the decisions we make with all our stakeholders”.

Clearly both the Commonwealth Bank and the ANZ are signalling that there are other costs besides the cash rate that impact on cost of funds. Things like term deposits, short and long term wholesale funds, securitisation, capital requirements and so on.

That total cost of funds then impacts on the bank’s net interest margin and in the end it all impacts on how much of the RBA’s rate cut the banks decide to pass on.

That all sounds fair enough and prime minister Turnbull has now given Shayne Eliott and his colleagues at the other major banks an opportunity to explain themselves before the House of Representatives economics committee.

But the RBA might have just made that explanation a lot harder.

Writing in the quarterly Statment on Monetary Policy the RBA said that bank cost of funds had been declining and crucially that, although the cost of some funds has risen recently for the banks, it is still cheaper than the funds it replaced.

Here’s the RBA (our emphasis):

Estimates of the major banks’ average debt funding costs declined following the May cash rate reduction, but by a little less than the cash rate, mainly reflecting upward pressure on wholesale funding costs. There had also been some upward pressure on the cost of term deposits. Nevertheless, the cost of new issuance by banks of both short and long-term debt has recently been below the cost of outstanding debt

Now how this exactly plays out for each bank depends on its funding mix. And, as an industry, Australia’s banks are a little less than 60% funded by retail deposits. So competition in the term deposit space can drive the cost of funds higher. Likewise raising capital, as the banks have been forced to do over the past couple of years, is at the upper end of the cost of funds curve.

But the RBA has just handed the major banks detractors a potentially potent weapon when the face Parliament to explain themselves.

Greg McKenna has been working in banking and finance for 30 years. He has worked at Westpac and NAB, is a former Treasurer of Newcastle Permanent Building Society, and is currently director at Police Bank.

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