Wednesday, 14 December 2011

Bank funding - it's price, not access to markets that is the issue

It is interesting to see a trickle of deals for some of the banks come through again as they try to lock in some term funding in the wholesale market. There is no doubt Australian banks have ready access to almost unlimited capital despite recent credit rating down grades. There are literally hundreds if not thousands of investors willing to buy Australian bank paper given Australian banks are some of the most credit worthy in the world and the sovereign background to them is even better.

Access to global capital markets for Australian banks is not the issue – nor has it been other than in the depth of the crisis at various times in 2008 and 2009.

The issue is price.

Like any offer to buy and sell (in this case bank debt), the price is the factor that determines whether a deal gets done.

The banks “difficulty” of gaining access to wholesale funding results from the fact that investors are demanding a higher return to lend more money to the banks – but the banks are less than enthusiastic when it comes to paying that higher price. Both of these factors create a temporary impasse in that market and leave an impression that the banks cannot get access to wholesale funding. That was and still is wrong.

Eventually something has to give and in this case, the banks as price takers have to pay more for their funding. This is the crux of the issue of bank funding right now.

It is not and frankly never was access to capital that is causing banks their concern – to reiterate, it is the cost of that funding. From the wholesale market, the price of that capital continues to rise. Risk has increased as housing (and with it banking) in Australia is less robust than a year or so ago. This is the issue that will mean that official interest rates will have an increasingly unpredictable impact on retail interest rates.

The cost of running a bank is increasing – it’s as simple as that.

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