By Roger J Kerr
One of the major banks is increasing its lending margin 'liquidity premium' by 0.15% this week as they claim that their own cost of funds has increased over recent months.
Borrowers should ask the bank in question for proof of this increase in the bank’s borrowing margins.
Certainly, the interest rates the banks are paying for retail deposits domestically has not changed for quite some time (see chart below) and if anything have reduced over the last six months.
The big four Aussie banks pre-funded their books for the next 12 months some time ago by borrowing in the offshore wholesale debt markets.
Over recent times their credit margins in credit default markets have reduced as evidenced by the iTraxx chart below.
Note that the banks’ cost of wholesale funds is closer to 150 basis points above BKBM for a three-year term by the time the basis swap costs back to NZD’s are added on.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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