Reserve Banks of Australia admits banks forced rate cuts
THE RBA has cut interest rates aggressively to intentionally offset the higher costs for banks.
THE Reserve Bank has cut interest rates aggressively to counter high funding costs for lenders, ensuring mortgage rates are at the right level, a leading central banker says.
In some of the most forthright comments on funding costs by an RBA official yet, Deputy Governor Philip Lowe said the central bank had intentionally offset the higher costs for commercial banks.
The official cash rate would be far closer to 5 per cent had banks not faced higher funding costs after the financial crisis and held back cuts to the base rate, Mr Lowe said.
RBA research shows that mortgage rates on average were about 1.5 percentage points above the cash rate in the 10 years prior to 2007. The difference has now blown out to 2.7 percentage points.
Speaking in Melbourne yesterday, Mr Lowe said bank bashing was understandable as the major banks had not done enough to rebuild ``the bond of trust'' with the community following the 2008 meltdown.
Banks needed to stop complaining about additional regulation in the wake of the crisis, he said.
Mr Lowe added that the rate-setting saga engulfing British bank Barclays was evidence that more needed to be done, along with the billions of dollars in trading losses uncovered at Wall Street bank JP Morgan.
"There has been a lot of brand damage done to the banking sector and it is understandable the community want something to be done,'' Mr Lowe said.
"More simplified risk strategies are needed, otherwise banks won't earn back the trust of the market and rebuilding trust with the community is even harder.''
Since late last year, the major Australian banks have held back an average of 30 basis points in mortgage prices of the RBA's 125-point cut to the cash rate.
The banks have blamed "volatile offshore funding markets'' even as deposit levels have risen to account for almost 60 per cent of bank funding - albeit at a higher cost than funds borrowed offshore.
Australian Bankers' Association chief Steven Munchenberg said a strong banking system was crucial for economic growth.
But Mr Munchenberg acknowledged there was ``no golden bullet'' solution to rebuilding trust in the community.
He warned the increased capital requirements and regulations under the Basel III rules being rolled out globally would make banks safer but also more ``expensive and exclusive''.
That could accordingly make it harder for retirees and poorer people to borrow money, Mr Munchenberg said.
"Neither the markets nor regulation are a perfect solution,'' he said.
"But there is a real danger at the moment that we are replacing a faith in markets with a blind faith in regulation as politicians often don't understand the implications of regulation.''
THE LOWE-DOWN
RBA Deputy Governor Philip Lowe on ...
THE BIG BANKS
"There has been a lot of brand damage done to the banking sector and it is understandable the community want something to be done"
THE GLOBAL ECONOMY
"While Australia did not have a financial crisis, the North Atlantic crisis is having a significant impact on our financial system"
STRONGER REGULATION
"Many of these changes are positive and, over time, they should enhance the safety and resilience of our financial system"