Bank funding costs spark rate hike fears


At the time, the BBSW was a key interest rate set daily by Australia's biggest banks and influenced how much consumers paid for mortgages, personal loans, credit cards and other forms of debt. In the midst of the Lehman Brothers collapse, there was concern the bank might need to be bailed out if the financial markets perceived it was a credit risk.

The Sydney Morning Herald


As he explained at the time, the BBSW was different to the Libor rate because it was a real market rate. The Libor was set by banks submitting estimates of their cost of fund. As Byers noted this week, the Libor was sarcastically referred to as the "rate at which bank's don't lend to each other".

But it is now increasingly apparent that the BBSW could have been rigged. In the same way that banks on the Libor panel submitted distortive rates to the panel, banks on the BBSW panel might have simply bought or sold bank bills at a certain price, with the intention of influencing the rate in a desired direction. So how did they fix the rate? ASIC has kept details close to its chest but it seems as though information provided by foreign banks, in addition to countless phone records and electronic chat transcripts , have built a strong case.

Sources told the AFR Weekend that if the BBSW was manipulated there is a fair chance it was on behalf of the big banks' "balance sheet" traders, who might have had large short-term positions in a related derivative contract. In the bond market, the big banks are both investors and brokers. The banks' treasury teams trade and invest in the bond and money markets. The banks' brokers, meanwhile, trade on behalf of clients, which include investment funds, central banks and the domestic banks' treasury units.

In theory, a bank's treasury, or "balance sheet", could benefit from a favourable setting by the same bank's broker. Brokers involved in the rate-setting process might have been compelled to submit trades that nudged on behalf of their client or the bank. Investment banks have also potentially attempted to influence the rate to favour positions of their traders.

Since it emerged that the BBSW was in fact corruptible, Australian regulators have sought to fix the process, with the Council of Financial Regulators publishing a paper proposing further changes to improve the process. Who were the victims of the rate-rigging? Commonwealth Portfolio Loan 1. Effective Date 4 October Farm Management Deposit Account - fixed term.

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Whatever the precise cause, it is estimated that every 10 basis point rise in the spread lowers the big four's profits by about 1 per cent. So the change since the start of this year could cut annual profit by 2 per cent if it continues and banks do not try to offset it.

The chief executive of industry fund-owned bank ME, Jamie McPhee, this week said higher funding costs and stiff competition in the home loan market would pressure its profit margins in the second half. Mr McPhee would not speculate on whether banks would respond by pushing up interest rates, but he said banks had responsibilities to both customers and shareholders. On March 20, Suncorp raised variable interest rates by between 0. Credit union CUA also raised various interest rates this month, pointing to pressure on its operating and funding costs.

Despite the rising costs, Omkar Joshi, portfolio manager at Regal Funds Management, said he thought the fierce political scrutiny of banks would prevent them from raising home loan interest rates.