"The claim that the recent increase in mortgage rates is due to higher funding costs is very dubious" ... Christian Carillo. <i>Illustration: Karl Hilzinger</i>

"The claim that the recent increase in mortgage rates is due to higher funding costs is very dubious" ... Christian Carillo. Illustration: Karl Hilzinger

Claims about higher funding costs by Australia’s big four have met with scepticism from an unlikely source - a large French bank, Societe Generale.

Tokyo-based Societe Generale Asia Pacific head of interest rate strategy Christian Carrillo said it was "almost mathematically impossible" that total funding costs for Australian banks were rising, as the sector argued this month, using it as a motive to lift mortgage rates independently of a Reserve Bank.

"The claim that the recent increase in mortgage rates is due to higher funding costs is very dubious," he said in a research note. "The mortgage hikes seem aimed at protecting their high profit margins."

Australia's major banks have lifted mortgage customers by between 6 and 10 basis point after the RBA shocked the market earlier this month by keeping the cash rate at 4.25 per cent. The banks have insisted that the cost of funds needed to keep lending into the economy were rising, driven in part by the volatility associated with the European debt crisis. The unpopular out-of-cycle rate rises followed announcements of job cuts by ANZ Bank and Westpac, further inflaming opinion about the banks.

Mr Carrillo said that an analysis of Australian Prudential Regulation Authority monthly banking statistics and RBA data on debt securities outstanding show that the source of most bank funding is onshore, where costs have actually been falling.

Australian banks' reliance on domestic funding has increased to an all-time high of 66 per cent at the beginning of this year, pushing long-term overseas funding to its lowest level since April 2009.

"Our calculations suggest that almost all sources of funding of Australian banks, except long-term overseas, are cheaper than their post-GFC highs and have kept falling since the second half of 2011 in absolute terms," he said.

Australian banks began to reduce their reliance on overseas markets for wholesale funding since the financial crisis.

“Australian banks are essentially an oligopoly," said Mr Carrillo. "They control most of the market anyway. They can effectively set rates where they want to."

"You have four big banks. They want to protect their profit margin. They can do it, so they do it.”

In a speech last week said the RBA said the cost of bank debt has risen since mid-2011, affecting both unsecured debt and covered bonds.
 
The RBA noted that the spread on senior unsecured debt over the bank bill swap rate, the benchmark cost of floating rate bonds, increased from 127 basis points in June 2011 to 185 basis points in February, the spread widening by 58 basis points.
 
Mr Carrillo, referencing the RBA speech, said that the BBSW itself has gone down by 70 basis points over that period.
 
"So in the aggregate, the Australian banks' senior unsecured funding is down 10 basis points from June last year," he said.
 
Australian Bankers' Association chief Steven Munchenberg disputed the basis of the report, saying it was impossible to average out the costs of the banks without taking into account the timing of the specific long-term debt of the banks.
 
"(The analysis is) lacking the specific bank funding models to say what the timing of all their fund raising is and also what they're paying for deposits outside of advertised rates," said Mr Munchenberg.
 
"Apart from the banks, only the RBA has that information."
 
"I would be surprised if he had access to the detailed funding of the banks, on a bank-by-bank basis," he said.
 
"You can't just look at the continuum of prices and average that out because the banks tap the market at different times."

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