The Deputy Governor of Reserve Bank of Australia, Mr Ric Battellino, in his recent address to the Retail Financial Services Forum, has outlined how the RBA has acted to improve the flow of funding to banks within Australia. Specifically, the RBA, through the use of monetary policy, has injected approximately $2 billion worth of extra funds into the market.
Additionally, the RBA has skewed its market operations more towards bank bills rather than government securities in order to enhance confidence in the liquidity of highly rated instruments in the bill market. Battellino states "the percentage of bank operations undertaken in bank bills has risen to around 80%, well above the usual 30% share".
Due largely to the declining sub-prime mortgage market in the US and its subsequent effect on global investment funds, many Australian banks have been feeling a 'squeeze' on funds. This has directly lead to upward pressure on interest rates. In fact, in response to the most recent rise in the cash rate (from 6.25% to 6.5%) some lending institutions have increased their interest rates by 0.8%. The funding pressure is felt more by Non-Bank financial institutions due to their reliance on the wholesale market rather than having additional access to retail deposits.
The 15.1% decline in the annual net profit of Rams Home Loans indicates the negative impact funding squeeze has had on Non-Bank financial Institutions.
In his address, Battalino remains positive about the Australian banking market asserting that it is in a "stable position". This sentiment is supported by the fact that approximately one quarter of Australia's $870 billion mortgage market is securitised by lenders.
Battellino goes on to say "In recent days, there have been some encouraging signs of improvement in markets, both here in Australia and overseas. The Bank will continue to monitor the situation carefully. If market developments warrant, the Bank has scope to further expand the provision of liquidity. These matters are being kept under review."
There is no doubt that the repercussions of the US sub-prime mortgage market have been extensive however, the severity and duration of its impact for Australian interest rates is yet to be determined. If funding pressure continues, it is likely that the competitive rates we have experienced in recent years may no longer be viable for the lenders. The RBA's monetary policy actions are only a temporary solution and continued funding shrinkage could lead to increased interest rates for borrowers.