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Insight: the war for deposits

If you have savings to put in the bank, there may be an upside to the gloom hanging over financial markets.

Banks have rarely, if ever, been as keen to get hold of your spare cash as they are today. And this means they are prepared to pay over the odds for deposits.

Mark Bouris: Term deposits and the RBA

We’ve forgotten a few things about the RBA when it comes to savings accounts.

It's a trend that gets largely overlooked in the monthly excitement about interest rates - which focuses overwhelmingly on the one-third of households with mortgages, who have not received the full value of recent Reserve Bank cuts.

Savers, on the other hand, have experienced the opposite effect. Despite official interest rates dropping to 3.5 per cent, one-year term deposits of $25,000 can still earn up to 5.3 per cent in interest.

The banks aren't being generous for the sake of it - they need the deposits to fund their lending. So why are the banks chasing savers' cash so keenly?

Before the global financial crisis, deposits were less important to banks because they obtained much more of their funds from borrowing on global markets.


Now, however, these markets are far less comfortable about lending to banks, even safe ones such as Australia's.

Overseas lenders to Australia's banks are demanding much higher interest rates, and this has sent the banks chasing domestic savings instead.

In the three years before the GFC, banks could secure term deposits for about 175 basis points less than the cost of borrowing on wholesale markets.

Now, however, term deposits have become far more expensive for the banks because they are having to pay households more for their savings.

It hasn't always been like this.

Before the global financial crisis, interest rates on term deposits and savings accounts were lower than the cash rate, because the banks didn't need to pay any more to entice people to bank with them.

In a win for savers, interest rates on term deposits are now significantly higher than the cash rate.

But the war for deposits is also squeezing the profit margins of the big banks, prompting them to recoup more from their customers with mortgages.