Westpac economists say tougher banking regulations to hit customers in the pocket

Westpac economists say tougher banking regulations to hit customers in the pocket

The ultimate impact of the Global Financial Crisis (GFC) and new banking regulations is likely to be higher interest rates for bank customers, Westpac economists say, with New Zealand banks up against it in trying to reduce their reliance on wholesale funding.

In a report entitled Raising interest, Responsiveness of retail bank deposits to interest rates, Westpac economists Brendan O’Donovan and Dominick Stephens discuss funding issues faced by banks against a backdrop of new regulations forcing them to seek more retail funding.

O’Donovan and Stephens say if banks can’t easily raise additional retail funds, and they find it expensive relative to the Official Cash Rate (OCR) to raise wholesale funds, they have little choice other than to “pay up” for their funding.

“The higher cost of funds will be passed on to borrowers, and the ultimate impact of the GFC and the new banking regulations will be higher interest rates, with little in the way of a change in the retail/wholesale mix of bank funding.”

The economists note that New Zealand banks source about 45% of their funding from retail deposits such as term deposits and transactional accounts. The rest comes from wholesale markets, with about two-thirds of this from overseas.

The cost of securing offshore wholesale money has risen significantly since the GFC. For example, ANZ chief financial officer Nick Freeman recently told interest.co.nz his bank’s wholesale funding costs were driven up by between 100 and 125 basis points by the GFC. This year’s Greek debt crisis had pushed them another 50 basis points higher.

Along side this, the banks must now meet the Reserve Bank’s core funding ratio (CFR). Introduced on April 1, the CFR means banks must source at least 65% of their funding from retail deposits and bonds with durations of at least one year. The central bank wants to increase the CFR to 75% by mid-2012 to offset New Zealand banks’ reliance on international wholesale, or 'hot' money, markets.

The banks are also facing new, global banking regulations from the Basel Committee on Banking Supervision. Moody’s Investors Service suggests the requirements in these for increased stable funding and liquid asset holdings will see structural changes to the New Zealand banking system and lower profits for the banks.

Meanwhile, the Westpac economists note the banks are competing more fiercely for retail deposits, driving up the interest rate paid on term deposits. See all bank term deposit rates here.

“The average six-month term deposit rate used to track the OCR quite closely, but over the past year banks have been paying 200 basis points over the OCR for six month term deposits,” O’Donovan and Stephens say.

“Despite this, there has so far been only a small increase in retail funds deposited.”

They say retail deposits are fairly unresponsive to higher interest rates and a “vast” improvement in financial conditions has contributed to slow deposit growth over the past 18 months with investors becoming more risk tolerant. 

O’Donovan and Stephens estimate that for every 100 basis points increase in term deposit interest rates, there is 4.5% extra growth in funds on term deposit across the banking system. However, there’s also a 2.7% decline in funds deposited in on-call accounts.

They also estimate the net effect of higher interest rates on total domestic deposits with banks. They found that a 100 basis points lift in interest rates leads to a 2% increase in total deposit growth.

“On this basis we concluded that the 200 basis points extra interest being paid on term deposits has garnered banks only 4% more retail funding than would otherwise have been deposited,” said O’Donovan and Stephens.

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"Tougher banking regulations to *benefit* customers in the pocket

The ultimate impact of the Global Financial Crisis (GFC) and new banking regulations is likely to be higher interest rates for bank customers, Westpac economists say, with New Zealand banks up against it in trying to reduce their reliance on wholesale funding.

Higher interest rates - sounds good to me!


Have you read this 'analysis' from Westpac?  So now we have 2 economists passing themselves off as statisticians.  Just throw in a couple of R squared’s, a pinch of F stats and the old Durbin Watson, and you have robust statistical analysis from a couple of economists.  Yeah, right!

There’s something about this ‘analysis’ that doesn’t feel right especially when you examine the facts.  You’ll note from the footnotes to the article that Westpac have cherry picked some of the data they’ve used – it’s far from a complete story.

Inconveniently for them, market term deposit growth has been slowing since the GFC, not increasing.  There are several tables to look at.  Try RBNZ SSR Part 1 B1 or SSR Part 2 BB1.  The answer is the same - term deposit growth has been slowing.  In fact, contrary to some reports, market term deposit growth (as reported by the Reserve Bank) has been relatively flat since Mar 10 (+$64m - SSR Part 2 BB1).

Higher term deposit rates are hardly increasing deposit growth as the Westpac article wants us to believe.

Hi Father Ted,

If you actually read the article, you will find that explaining the slow growth in deposits over the past year is *the whole point*. These are all from paragraph 2:

"...over the past year banks have been paying 200 basis points over the OCR for six month term deposits. Despite this, there has so far only been a small increase in retail funds deposited."

"...retail deposits are historically fairly unresponsive to higher interest rates."

"...a vast improvement in financial conditions has contributed to slow deposit growth over the past 18 months."

You will also find that the data used in the study is the very same RBNZ SSR that you refer to.





I don't know about the rights or wrongs of the article, but I agree with Father Ted that it has a bit of a Data Analysis 101 feel about it.

The claim that I have an issue with is where the article states that paying an extra 200bps has resulted in an extra 4% in retail funding.  This is such a nonesensical conclusion given the data inputs used.

Secondly, the SSR data used in the analysis omits the less than 90 day deposits, which account for 30% of all term deposit funding.

It's almost like these 'economist statisticians' started with an end game and set about creating analysis to support it. 

I am praying for the authors of the report.

Hi Father Ted, thanks for praying for me.

You'll find that the main result - that 200bp higher interest rates leads to 4% growth in deposits  - refers to the responsiveness of total deposits to interest rates. Total deposits includes term deposits of all maturities, as well as all transactional accounts.

I did separately look at the behaviour of term deposits with maturity 90-days or longer versus transactional accounts, to illustrate how money moves around within banks when interest rates change. There were two reasons I focussed on term deposits with maturity 90 days+ in that part of the study. First, TDs of shorter maturity are thrown about by past decisions regarding longer-dated term deposits. For example, if the six-month TD interest rate jumps and people rush into 180 day term deposits, three months later there will be a jump in deposits of 2 to 90 days maturity, simply because the earlier deposits are changing class. Secondly, the interest rate used was a six-month rate (because that's the only one available), so it made little sense to focus on TDs of very short duration. In any case, none of this has any bearing whatsoever on the headline result in the paper, which is the part you seem to have trouble with.

Statistics is a key part of economists' tool kit. Traditional double-blind experiments are difficult, or impossible in the case of macroeconomics, meaning we have to rely on historical data to test theories and establish empirical relationships. Consequently, economists are normally trained in statistics to post-graduate level (although we call it econometrics). Some economists specialise in the theory of econometrics, and many advances in statistical theory have actually originated from econometrics. Most academic papers in economics have a statistics component - otherwise there is no way of testing theories against the actual data. Practising macroeconomists use statistical techniques every day to establish relationships upon which to base forecasts. What other evidence do you suppose we should use? My view is that anybody can tell a story, but it is not until we dig into real-world data to assess the evidence that we are able to tell the good stories from the bad ones.

That said, I'm not claiming to be the world's greatest expert. In keeping with standard practise, I've provided details of exactly how the study was done, along with sources for all the data, so that others can replicate the research and identify any flaws. If you like, send me an email and I will reply with the data set, and you can assess the validity of the results for yourself.

Costs up, demand down, welcome to the business world. Those profits may go down!

 "..The higher cost of funds will be passed on to borrowers.."

Oh how bloody terrible...how awful...what a disaster...it will mean a drop in the demand for credit...bugger...property stupidity might come to an end...the banks will not be able to carry on milking the system...getting fat...bloated bonuses for bosses...what an utterly dismal picture for a banker!

A horror story that can only end with people saving most of the cost of a home that has fallen in price from a bloated madness to something the average peasant can afford. Shite...we can't have something like that taking place in Noddy....quick Bolly...do something to stop it....get with the QE madness and flood the banks with cheap toilet paper...come on Bolly...you have to save the fat arsed bankers.

Sure seems as though the fat arsed bankers are being saved in the euro pigsty!


 "As protests mounted, the European Commission proposed new measures threatening euro zone countries, such as Spain and Ireland, with multi-billion fines if they did not hold firm on budget cuts aimed to stop a Greek-style debt crisis tearing the European single currency apart."

It's a story all about saving the banks...socialising their losses..guaranteeing their bonuses and bloated pay packs...make the peasants pay...suckers.....