The minutes from the Reserve Bank of Australia’s (RBA) Monetary Policy Meeting have been released today (17 July) on the back of recent news about Australian banks facing a funding gap shortfall.
Members of the RBA held a “high-level discussion” to talk about the increasing levels of household debt that are, in part, attributed to current fiscal problems facing the major banks.
With superannuation funds expected to deviate from cash transfers to international assets and currently indebted homeowners managing their cash flow through a reduction in their savings, banks are set to have a $70bn gap to fill.
This high household debt, shared across social classes, may contribute to a reduction in consumption as people aim to protect themselves from increased vulnerability to economic shock.
RBA members also observed that the cash rate set by major Australian banks tended to be noticeably higher than those seen in many other banks globally, except for the US Federal Reserve.
The reason for the dramatic increase in the funding gap between the values of bank loans and deposits is mostly due to a complete stall in short-term funding, leading banks to change their typical mortgage cycles for rate increases as the costs of this gap continue to rise.
Economists from the National Australia Bank (NAB) said that the current gap between funding loans compared to the growth of deposits has risen $67bn from the second quarter of 2017 to the first quarter of 2018 to a current total shortfall of $457bn. This has left banks scrambling for extra cash to make up for the gap.
The funding gap, said to have originally occurred due to US interest rate spikes, is likely to further increase pressure on funding costs.
This deviation from funding expectation has led to banks looking for other ways to fill the gap, with one expected method being the need to write down more deposits themselves to attract initial investments from both corporations and potential home buyers. With short-term interest rates already threatening to balloon to relative crisis levels, banks may have to enter the money markets themselves to quickly address the situation.
Knock-on effects have already been seen around the country, with non-major banks such as Macquarie and AMP bumping up their mortgage rates. This has naturally led to speculation in financial media that the big players are set to follow in their tracks.
With higher borrowing costs likely to pass on to households, there is a chance of a further run on savings to balance out the increase in costs.
NAB released official data confirming the possibility of these trends, with Australia-based funds diverting their own cash resources abroad. It made comparisons to two years ago, when Australian-managed funds totaled the same figure as those fund managers operating with international assets. Since then, the latter has increased significantly compared to the former, suggesting very little growth in one area compared to the other over a two-year period.
Separate data released by the Association of Superannuation Funds of Australia showed a small decline in “large superannuation fund cash balances” of $2bn, reducing the overall level to $180bn. This compares to a more-than-modest increase in international investment of $57bn, taking the total figure up to $396bn.
With levels of managed funds in cash and deposits heading toward percentages last seen in 2007 before the last global financial crisis, analysts are calling for capital funding to help meet the need for growth in deposits to be faster than the rate at which banks are currently able to lend.