A National Australia Bank (NAB) research chief has raised concerns about an impending shortfall in bank funds as super funds move away from cash holdings and customer savings dwindle.

NAB Global Head of Research Peter Jolly said that Australian banks will need to raise $70bn to close the ‘funding gap,’ which is the difference between bank funds on loan and deposits. Some smaller banks are now having to impose interest rate increases on mortgages as liquidity dries up.

This out-of-cycle hike in rates is expected to further squeeze already indebted households.

NAB researchers found that the funding gap increased from $390bn to $457bn between Q2 of 2017 and Q1 of 2018. This means that banks will need to find an additional $60bn to $70bn.

Jolly said that one cause of this gap is super funds transferring money into overseas assets. He commented: ‘In my judgment, leakage of deposits and cash from Australia’s banking system – at an inopportune time when US dollar funding spreads are wider – has been one of the key factors. One channel in recent quarters has been domestic fund managers allocating away from cash and deposits to other asset classes – particularly overseas assets.’

The shortfall may result in banks raising interest rates on savings accounts to attract more deposits from retail and institutional investors and prevent having to turn to the financial markets. Crisis-level short-term interest rates make this an inopportune time to be considering such measures.

Major banks may have to follow smaller lenders such as Bendigo Bank and Macquarie in raising mortgage interest rates due to the bank bill swap rate rising. This does not bode well for borrowers and paves the way for higher borrowing costs, as predictions show that falling house prices will continue to tumble for the rest of the year.

NAB data revealed that managed super funds in Australia are drawing down their cash assets and moving them offshore. In 2014, managed funds had 15% of their assets allocated to cash and deposits. This figure fell to 10% in Q1 of 2018, close to the low seen during 2007 right before the financial crisis.

The fall in deposit growth reflects an often-referenced weakness in the Australian financial system: the tendency to turn to the capital markets, which can be volatile and risk-heavy, to fill the funding gap. Analysts and researchers are now worried that bank lending is outpacing their ability to attract deposits, putting more reliance on the capital markets as a stop-gap measure.

Statistics showed that there was a 4.8% increase in bank lending in the 12 months leading to May, while deposits during the same period only rose by 2%, increasing the funding gap. Prashant Newnaha, Senior Interest Rate Strategist at TD Securities, said: ‘So we have a picture of banks extending credit at roughly the same rate over the past year, but the slowdown in deposit growth has been much sharper.’

Newnaha went on to say that the decrease in deposits from June 2017 has been a key factor in the rise in the cost of bank funding. He added that remedial measures of increasing deposit rates or relying more heavily on capital markets will, in turn, raise the cost of bank funding.

The drop in the household savings rate will also contribute to a slowdown in deposit growth, according to Newnaha: ‘Now there is clear risk that a larger proportion of household income will be directed towards servicing higher mortgage repayments.’