Banks race to borrow offshore


From the SMH:

Australian banks have relied on wholesale finance to bridge a funding gap for the fourth month in a row, as an expansion in lending continues to outstrip deposit growth.

…But as lending increases, deposit growth is failing to keep pace, pushing banks to raise more debt from wholesale markets. During the year to June, there was a $14.7 billion funding gap between deposit and loan growth, as banks switched their focus towards other cheaper sources of funding.

Commonwealth Bank of Australia analyst Tariq Chotani said deposits from households and businesses had only funded 59 per cent of loan growth in the past year, compared with 85 per cent last calendar year.

For Christ’s sake, move APRA.

Houses and Holes
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  1. Why don’t they raise rates? Attract more of the local stuff?


    Iceberg dead ahead!

    Go to full steam!

    • Actually this might be happening. Some of the online savings accounts registered a slight rise in the bonus rates this weeks. A first in over a year.

      • Ubank is at 4.17% from 3.81. Atleast for the time being.

        Edit: Also westpac and cba seem to have increased their bonus rates.

      • There’s the answer to our discussions yesterday about why the sudden rise in deposit rates by UBank and CBA, among others. Banks don’t just raise deposit rates for nothing! When you smell a rat in the finance game just follow the money trail…..

    • 1. Government should abolish savings on tax, or at least index them.

      2. Banks should increase savings rates. Like you’ve said HnH it is ridiculous that APRA have not moved on this issue of offshore borrowings.

  2. “For Christ’s sake, move APRA.”

    Oh – this is going to be awesome.

    Had a bit of a thought this morning, something we haven’t heard much of lately – but the old boomer retirement issue must me gathering steam.

    • What thought is that @Lev? I’m surprised the grey army aren’t up in arms about interest rates being so dismal.

  3. Let’s just review APRA’s duties:

    BANKING ACT 1959 – SECT 12

    APRA to protect depositors
    (1) It is the duty of APRA to exercise its powers and functions under this Division for the protection of the depositors of the several ADIs and for the promotion of financial system stability in Australia.

    (2) To avoid doubt, section 8A of the Australian Prudential Regulation Authority Act 1998 (which deals with trans-Tasman cooperation) applies to the performance of functions and the exercise of powers by APRA under this Division.

    The Act creates a duty, but I can’t see any penalty for the breach of it…

    • “…promotion of financial system stability in Australia”

      I wonder if anyone who works at APRA has read this bit.

  4. I have a couple of questions out of general interest, maybe someone here more knowledgeable than I can answer them.

    What are offset accounts classified as? Are additional payments above the bank agreed ones into an offset account classified as deposits?

    What kind of offshore borrowing are the banks engaging in? Writing covered bonds?

  5. There are two types [functionally equivalent] offset accounts – offset and redraw. Offset is a separate deposit account where the bank uses the interest paid on the account to offset loan expense. This a deposit for all intents and purposes (i.e. increases bank liabilities) and the bank will usually retain the right to vary the level of offset. The other type of account is a redraw account. This is where the loan borrower physically prepays their loan account (reduction in bank assets) but the lender will allow them to redraw to their scheduled balanced. The issue with the redraw is that redraws are at the discretion of the lender. So you can see that in both instances, there is a reduction in loan cost, but lenders retain different types of control.

    As for the question about covered bonds, there has been some issuance this year, but volumes are fairly light relative to senior unsecured term issuance.

  6. Does allowing banks to borrow offshore contribute to pushing up house prices and if so, why allow it if it just pumps up the bubble even more making the eventual bust even worse?

    • Simple answer: $$. That is some people is making ludicrous amounts of money in this, and some people are being asked to look away in the promise of future $$.

    • littleguy
      It pumps up the bubble but also GDP and increased employment in retail and domestic service industries. In the end it is all financed by more overseas borrowings and asset sales.
      Note: Not arguing against you. It’s just most people don’t seem to get the connection. Correcting distortions is not without some hardship for some somewhere!

      • My problem is I can’t see how this can end without an awful mess and I’m just wondering why the people at APRA aren’t asking these questions. Surely they are also taxpayers who hope to retire someday too.

  7. If deposit growth is dropping and the banks are borrowing from overseas, why are they still dropping interest earned on savings deposits.
    Surely they should be offering better interest to attract local depositors.
    Seems kinda stupid.

    • Not really stupid from banks point of view — borrowing offshore is much cheaper due to AAA guarantees.

    • Seems kinda stupid.

      🙂 Since when did that have anything to do with Australian economic decision making?

      P.S. You would get a drop in your consumption. So retail, restaurants, service industries get a caning. Unemployment rises!

      The choices are becoming harder and harder.

    • A couple of recent surprises were discussed last night – namely UBank and CBA suddenly jacking online saver rates to above 4%. Not bad considering. I’m more surprised at the need for this if offshore funding is so cheap and plentiful…..which might suggest APRA involvement in there somewhere.

  8. Overseas money is cheap. As long as they manage the rollover and exchange rate risks, banks are right to be doing this.

    • … as long as RBA and the government do not bailout the banks when/if they fail to rollover the short term offshore borrowing (like they did during the GFC)

  9. I thought it had become fairly well established that loans create deposits. There fore banks are only using offshore funding due to price and term preferences…
    A perfectly rational business decision. So…
    What is it that you want APRA to do?

  10. Even StevenMEMBER

    I think Parrott has the right of it. The risk is that the funding from overseas is short term in nature whilst the home loans are long term in nature. The issue is that if overseas investors / buyers get nervous for whatever reason, the banks won’t be able to rollover their funding…

    In such circumstances, the banks will have to obtain funding from domestic markets (i.e. By offering higher rates on deposits / domestic issuance) or else pull back lending (‘credit crunch’) or both. Or the Aus govt steps in.

    So I suppose the banks are after an optimum blend of funding stability and cheapest funding source. Probably APRA too.