A review of 'Trends in the Funding and Lending Behaviour of Australian Banks', Reserve Bank of Australia, Research Discussion Paper, RDP 2013-15, December 2013.
In their article 'Trends in the Funding and Lending Behaviour of Australian Banks', Reserve Bank of Australia, Research Discussion Paper, RDP 2013-15, December 2013; Stewart, C., Robertson, B. and A. Heath, discusses the lending and funding behavior of Australian banks. They acknowledge banks as the foremost intermediaries between the numerous agencies of the economy. In a specific term, banks allow for transactions between the stake holders in the economy of Australia by either offering loans and facilitating payment. However, there are fundamental difference that exists between banking systems of Australia and those of the overseas countries.
The most obvious of the differences between banking in Australia and other international banks is the amount of funding sourced from deposits. RBA (2012), had noted that, whereas the deposits of the Australian banking had increased, it only comprised under three-fifth, and it is below the international average of the other lending institutions. The Australian banks are more inclined towards retail banking, as opposed to the international counterparts. Therefore, they tend to lend to households other than business, and hence have small scale investment banking activities. Residential loans are up to 60% in Australian banks as opposed to 40 % of Canada and USA. This trend has a historical backing since the decline of nominal interest rates and a larger fall of inflation in late 1990’s.
The rates of the banking systems in Australia vary. The rates are determined at the discretion of the leader other than margins as it is in other countries. The rates in Australian banking systems tended to decline. Since 1993, the Australian banking system has experienced a steady growth of about 15% annually. The system was also not affected by the global financial crisis that had the profits margins of its counterparts drop significantly.
The Australian bank significantly differ from the internal banking system in that it has a greater use of the wholesale funding; in particular offshore trading. This gives a reflection of the influence of macroeconomic, bank-specific, and institutional factors over time. A historical aspect has influenced the Australia’s wholesale banking. Before the global crisis, the household sector had a willingness to increase its gearing, and this facilitated by deregulation alongside shift towards lower inflation environment led to decrease in cost and consequently increased availability of finances.
As recorded in Kent et al. (2007), these factors were particularly stronger in Australia and operated simultaneously and thus, banks continued with intermediate funding for the cooperation. However, deposits were slower than the credit growth but were growing faster the nominal income. This was associated with the decisions on the allocation of the households. Since 1990, Australian household had a low share of wealth held in financial assets, this was on a declining trend. This could be explained by the compulsory superannuation scheme that was associated with lower shares of financial assets held directly as deposits as opposed to the other countries.
The inclination towards offshore wholesale funding allowed for diversification of their funding sources, and this was supported by the banks’ ability to hedge foreign-currency effectively by denominating offshore funds in Australian dollars. Bannier and Hänsel (2008), had noted that the size, composition and behavior of the banks that operate in Australia influenced the share of wholesale funding. Australia has about 50 of the largest banks in the world, and therefore, was able to do whole sale trending. Although foreign-owned banks have larger wholesale debts in Australia, it is not clear whether they hold the largest asses.
Large and small Australian institutions had increased securitization before the global crisis began. The fall of securitization in later years made the small and non-deposit-taking lender compete favorably. To reduce liquidity risk, an original maturity of more than one year is used relative to other systems.
After the global crisis, there was an increased focus on deposit banking (Edey 2010). Deposit funding was made to reduce liquidity risks. As the demand for deposit funding increased, there was an increase of supply of deposits from the households and business in Australia mainly from the superannuation funds. Debele (2013a) opines that change in capital inflows influenced the banking system. This alongside composition changes changed the nature of liquidity. The maturity of Australian banks is over five years after issuance. Substituting wholesale debt for wholesale debt would be illusory.
Liquidity-risk benefits from increasing share of deposits could be offset if banks increased credit risk exposure to boost the returns since higher funding costs associated with switch funding from sources with low liquidity risks. However, the changes in the nature of capital flows that contribute to an increase of the deposit share of funding may alter the total amount of liquidity risks in the economy. There are implications of emphasis on the deposit funding. This increases the cost of deposit relative to those of wholesale funding. This also reduces the speed at which pricing changes in the funding instruments and also the overall lending costs.
It also has implications in the economy, the deposit growth limits lending growth if there is an increase in credit growth or domestic savings decrease (Coffey 2012). Should the federal government funds a budget deficit through issuance of Commonwealth Government Securities, there would be no effect on the value of deposits if the securities are purchased by private-ADI sector. If the CGS is bought by the banks, the private banking sector’s holdings shall increase. Total deposits in the economy shall be affected by changes in the banking sector. Non-bank crediting institutions shall make the supply of funds increase. Investor preferences between deposits and non-banking sector assets do not necessarily influence the amount of deposits.
The increased deposits made the banking sector cynical. Volatility in the wholesale banking makes the large deposit based institutions to be favored for wholesale funding. Competitive pressure made the household mortgages reduce in early and mid-1990s (Broadbent 2008). Ever since the financial crisis, the coast for funding has increased in Australia. The lending also remains strongly anchored in changes of cash rates. Banks use risk premiums in lending rates depending on the risks associated with different types of loans.
The increase in the range of spread has been varied for business loans. The pricing risks have included discounts on new loans. The mortgage rates remain consistent despite the changes in the pricing of risks. The changes in the pricing risks may change the preferences of the borrowers. Profitability in the Australian banks has remained on average 15 %. Australian banks had experience decline in deposit, deregulation and lower inflation increased households leading to wholesale debt in an attempt to close the gap. Reassessment of risks led to increased lending rates. The combination of these factors may lead to the global crisis, and hence banks have attempted to cushion themselves against this by diversifying their activities, increase efficiency, and other activities.
The article is has a very well composed title that is clear and precise. But there seems to be unclear connection of the topic and the content right from the introduction. In the introduction, the authors do not give proper background of the problem per the tittle. The discussion should be well formulated and connected right from the tittle. For example, the title seeks to establish the Trends in the Funding and Lending Behaviour of Australian Banks, the authors in the abstract begin by stating that the article draws themes from the previous Reserve Bank of Australia. They outline the role the banking systems plays in the transmission of monetary policy and transformation of risks! The authors proceed in the abstract are not clear since the data sources stated in it is only one, and also there is no specific methodology given. In a rather serious research, the background, literature reviews, methodology, discussion and recommendation with clear and precise conceptual framework have to be provided.
With a poorly done introduction and background information, the article falls short of proper connection in the body. The authors jump into declarations that are supported by few sources especially in the introduction art of the article. There are little authentication of the differences outlined especially by lack of evidence form the international countries. One wonders what international counterparts are supposed to mean in the article. This more because of the comparisons are been done between Australia and Canada, USA, and few other countries. What happens to the great economies like South Africa, china, and others? There should have been the scope of research that limits the researcher to specific countries other than try and error work.
Most of the comparison is supported by one or two sources, this may not necessary be the actual scenarios on the ground. It is interesting to find that there is no consistency in the compassion. On one issue, the comparison is 10 countries most of them in the Europe and more than ten on yet another issue. Such a comparison is not the same. Consistency makes the data obtained realistically practical and clear. Such variations cannot lead to specific conclusions and or recommendations.
The article lacks purpose. What is the reason for carrying out the research and writing the article? A discussion should also have a clear thesis stamen that is unambiguously stated. Although it can be assumed to be entirely for knowledge purpose, an article that talks of actuals and continuing economic activities should have a clear intent. Of what importance is knowledge ha has no any one particular use? There is enough research on the implication to specific economic aspects but without recommendations. This was not also stated anywhere at the beginning of writing the article especially in the title. Therefore, the Authors are supposed to have included a thesis statement with a problem that has to be solved through recommendations.
It is therefore, evident that, the authors deviated significantly from the tiles and erred by wandered in academic bush for far too long especially in the last parts of the article. However, there exist specific and distinct differences between the Australian banking system and the other international banks. This is in line with the topic, but it would have been better than what has been offered.
References
Coffey P (2012), ‘Bank Funding in the New Environment and the Provision of Credit in Australia’, Speech to the Australian Banking + Finance Randstad Leaders Lecture Luncheon, Sydney, 31 August.
Debelle G (2004), ‘Household Debt and the Macroeconomy’, BIS Quarterly
Review, March, pp 51–64.
Debelle G (2013a), ‘Funding the Resources Investment Boom’, Address to the Melbourne Institute Public Economic Forum in Canberra ‘The State of the Australian Economy: Prospects for Growth’, Canberra, 16 April.
Edey M (2010), ‘Competition in the Deposit Market’, Speech to the Australian
Retail Deposits Conference, Sydney, 19 May.
Kent C, C Ossolinski and L Willard (2007), ‘The Rise of Household Indebtedness’, in C Kent and J Lawson (eds), The Structure and Resilience of the Financial System, Proceedings of a Conference, Reserve Bank of Australia, Sydney, pp 123–163.
RBA (Reserve Bank of Australia) (1998), ‘International Comparisons of Bank Branches - An Update’, Submission to the House of Representatives Standing Committee on Financial Institutions and Public Administration, April.
Robertson B and A Rush (2013), ‘Developments in Banks’ Funding Costs and
Lending Rates’, RBA Bulletin, March, pp 63–70.
