Tuesday, October 5, 2010

Take it for the team (Updated)

This blog does not have a great deal of sympathy for complaints about bank gouging when it comes to interest rates. The reason is simple. If a nation wants to run a housing bubble based upon foreign borrowing then it should accept the logical consequences - that sooner or later competition will collapse around too-big-to-fail banks.

That does not mean, however, that we should turn a blind eye to the bank gouging. We might conclude we wish to accept it in return for our bubble, but we should at least know what it is we're dealing with.

So, this blogger has been doing some digging in an effort to figure out whether the line being put by the banks that they must raise rates because of increased funding costs makes any sense.

We already know that term deposit rates have been falling recently, so it can only be wholesale money the banks are referring to.

The above chart is the available history of AA capital market rates paid by the banks. As you see, rates have been in a stable trading range between roughly 5.75% and 6.25% for at least 15 months, right up until a few days ago.

Although September was at the high end of the range, August was at the low end, and this blog can't remember any bank chatter about cutting rates. Basically, there is no argument here for increased funding costs.

Of course, as the banks role over there funding from years ago, it may be at higher rates. Though from this chart, for that to be true, it must be pre-June 07 because funding was much more expensive back then. This is at least plausible given the surplus savings being thrown around from 2004 to 2007 by emerging markets that held rates in check in developed economies.

It might also be banks being pushed toward longer maturities in their offshore funding by APRA, for which there was some evidence in the Financial Accounts recently, as noted here. This, we might determine, is a worthwhile trade.

Sadly, however, owing to the Invisopower! deployed by our financial overlords, we are in no position to judge. Just sit there and take it for the team.

This blog managed to find the below chart in the bowels of the RBA:

It clearly shows that as discussed, wholesale funding rates were consistently about 75 basis points cheaper pre-GFC.

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