Recent Developments in Banks' Funding Costs and Lending Rates

The global financial crisis has affected the cost and composition of Australian banks’ funding, with flow-on effects to their lending rates and net interest margins. Since mid 2007, Australian banks’ overall funding costs have risen significantly relative to the cash rate, mainly reflecting the higher cost of deposits and long-term wholesale debt, and changes in their funding mix. Australian banks’ lending rates have also risen significantly relative to the cash rate. For the major banks, the increases in lending rates have more than fully offset their higher funding costs, with their net interest margins in late 2009 about 20–25 basis points above pre-crisis levels. Since then, margins may have narrowed slightly.