The Australian Centre for Financial Studies and KPMG have released a joint report on the future of bank funding in Australia, concluding that, due to slow-changing factors such as the balance of payments and superannuation arrangements, the mix of funding sources is unlikely to change substantially in future years.


The study examines the current situation including the difference in funding patterns between major and second tier banks and the heavy reliance of the major Australian banks in particular on wholesale funding, much of it from overseas.


The foreword to the study notes that while Australian banks weathered the GFC with distinction, their reliance on offshore funding was evident. The need to generate liquidity domestically has been further underlined by the proposed Basel III liquidity standards, issue in September and December last year.


The report concluded that while government initiatives to develop local bond markets could see this funding source increase in importance, the national requirement for financing of the balance of payments deficit would see the major backs in particular to continue  to utilize international capital markets.


“Government approval to issue covered bonds will enable major banks to tap different investor groups (both  domestically and internationally), but tight limits on amounts issued relative to balance sheet size, and issuance costs for smaller amounts, will make it difficult for smaller institutions to tap into these funding sources.”


The report saw ‘limited scope’ for greater reliance on household deposits, and saw the alternatives for bank funding as being primarily increased capital inflows into equities or corporate offshore borrowings.


The National Australia Bank has responded to the report, arguing that it strengthens the calls for fairer tax treatment for Australian savers to be on the agenda for the Treasurer’s Tax Forum.


NAB Executive Director of Finance, Mark Joiner, said that a stronger deposit market and a fairer tax treatment for Australian savers could help relieve some of Australia’s offshore funding burden and the extra pressure it can put on interest rates.


Mr Joiner said that nearly all growth was coming from offshore, with Australian bank’s foreign liabilities increasing from 7% in 1990 to 24% in 2010.


Currently there are tax breaks in place for most asset classes - shares get dividend frankings, superannuation is taxed concessionally and property can be negatively geared. However there is no such tax support for deposits and the Australian savers who use them.


Mr Joiner said the Government’s proposal to allow financial institutions to issue covered bonds is a welcome development and a good start, however, it is not on its own the solution to the funding issues Australia is currently facing.


The report, The future of Australian bank funding, is available at