Global funding pressures on the big banks are easing, with the cost of raising new debt falling to levels not seen since before the latest outburst of eurozone turmoil, the Reserve Bank says.
In its latest check-up on the financial system, the Reserve today said the premium banks were paying to raise funding had fallen to levels similar to those of mid-2011, allowing the big banks to issue a larger share of cheaper unsecured debt.
‘‘Banks’ bond spreads have narrowed, and are now comparable to levels of mid 2011, prior to the escalation of the euro area debt problems,’’ the RBA said in the September Financial Stability Review.
But with household and business credit growth expected to remain subdued, it called on banks to resist to lower lending standards in pursuit of ‘‘unrealistic profit expectations’’.
In the last six months, the relative strength of the Australian banks had allowed them to raise $50 billion on money markets, most of it unsecured debt.
‘‘Offshore investors have focused on the relatively strong position of the Australian banks compared with those in some other countries,’’ the report says. ‘‘The banks have therefore been able to take advantage of periods of more favourable market conditions to issue opportunistically.’’
The big four’s total exposure to Europe, at 0.6 per cent of assets, was ‘‘quite low’’, and the bigger risk remained the possibility of credit markets freezing and cutting off Australian lenders’ access to credit.
Alongside the improvement on credit markets, the big banks were continuing to obtain a larger share of their funds from domestic deposits.
The big four say this intense competition for deposits has pushed up their costs and prevented them from passing on cuts in the cash rate to borrowers in full.
With more than half of bank funding obtained from deposits, up from 40 per cent in 2007, the Reserve said funding costs and slow credit growth had dampened bank profit growth in recent quarters.
Banks were cutting in costs to help revive growth, and had so far avoided ‘‘inappropriate risk-taking’’ in the search for higher earnings. However it also warned the banks against taking excessive risks in order to hit “unrealistic” targets.
‘‘With demand for credit likely to remain moderate, a challenge for firms in a competitive banking environment will be to resist the pressure to ease lending standards to gain market share in the pursuit of unrealistic profit expectations.’’