what the RBA say about banks and rates.
www.rba.gov.au/publications/bulletin/2012/mar/5.htmlthis bit is taken from about halfway through.
Banks' Lending Rates
For close to a decade prior to the global financial crisis, banks' overall cost of funds followed the cash rate closely, as risk premia in markets were low and stable. There was also little change in the relative importance of equity capital that, together with debt, provides funds used to make loans and on which banks seek a return. Likewise, there was little change in the risk margins banks used to determine loan rates. Accordingly, interest rates on business and housing variable-rate loans tended to adjust in line with the cash rate. Nevertheless, over this period there was a gradual decline in the spread between average interest rates paid on housing loans and the cash rate, as the discount to the indicator rate offered to new borrowers was increased. Indeed, the spread between the average mortgage rate paid and the cash rate declined from 275 basis points in 1996 to around 125 basis points in 2007.
Since the onset of the financial crisis, banks have increased the spread between lending rates and the cash rate for all loan types. The increases have, however, varied across the different types of loans, partly reflecting differences in the reassessment of the riskiness of those loans and expectations regarding loss rates.
Over 2011, the average interest rate on new variable-rate housing loans decreased by about 10 basis points relative to the cash rate as banks increased the size of the discounts on new mortgages amidst stronger competition for mortgage lending (Graph 9). In the latter stages of 2011 and early 2012 there was, however, a small reduction in these discounts. Furthermore, in early 2012, most banks increased their standard variable rates by an average of about 10 basis points. Consequently, between early 2011 and early 2012, the spread between new variable-rate loans and the cash rate has increased by about 5 basis points. The spread between the average interest rate on outstanding variable-rate housing loans and the cash rate has risen by a similar amount.
Graph 9
Click to view larger
Around two-thirds of business loan rates are tied to the bank bill swap rate rather than the cash rate. The level of interest rates on loans to large and small businesses has fallen broadly in line with the declines in benchmark rates over the past year, although this resulted in some increase in these rates relative to the cash rate since mid 2011. Risk margins on business lending have been little changed over the past couple of years, although in the case of large business lending some of the recent stability in margins on outstanding loans is likely to reflect the gradual repricing of facilities (Graph 10). This follows a period in which there was a noticeable increase in business lending rates relative to benchmark rates, reflecting a combination of higher relative funding costs and a reassessment of risk margins (RBA 2011). Higher risk margins resulted in both an increase in average spreads as well as a noticeable increase in the range of spreads paid on the stock of business lending. As a result of the former, small business rates, even those secured against residential property, are above the interest rates on housing loans
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My day would not be complete without an Alan graph. If the ABC would bring the chick from the 24 channel back to the 7pm news I would be in heaven with her and Alan's graphs
