Have you heard the one about banks and wholesale funding?
Most likely you have, it’s become one of the banks’ major defences when they raise their borrowing rates above those of the reserve bank.
Often there are rumblings in the media from the banks, suggesting borrowing costs are up and how they’ll have to raise rates in response.
As you’d know, this is an attempt to soften the borrowing public up for that inevitable rate hike.
Not that it worked last time, the mood in mortgage land was Egypt like, but ultimately no one left their house to protest.
So there was a strange irony recently, when ratings agency, Moody’s, put the big four banks on review for a possible downgrade because of their reliance on wholesale funding.
Suddenly, the banks were eager to point out wholesale funding was no longer a problem!
It would be nice if they had their story straight because they can’t have it both ways.
Yet if Moody’s does downgrade the banks, their wholesale borrowing costs could possibly rise, which illustrates a vicious cycle that has now developed with banks and their customers.
Australians’ lack of saving, and our appetite for mortgage debt, has combined to send the banks offshore to fund our borrowing, but this can leave banks and borrowers vulnerable if credit markets dry up.
Housing is a function of credit, so it’s worth noting wholesale offshore bank debt has essentially tracked housing finance commitments over the past fifteen years.
In other words – house prices have seemingly risen with money the banks borrowed from overseas and lent to us.
Household borrowing is currently flat, but any increase will probably push banks to look for funds offshore again, making them vulnerable for a Moody’s rating downgrade.
This takes us back to square one and potentially higher rates!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we ‘re one of only six fiduciary financial advisors in Australia. We think we’re the best financial advisers in Tasmania.
