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Cheaper borrowing for banks but risks remain -

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Cheaper borrowing for banks but risks remain

Sue Lannin reported this story on Monday, September 14, 2009 12:18:00

ELEANOR HALL: The central banks' central bank says borrowing costs for financial institutions have
fallen but that won't necessarily mean lower interest rates for consumers. The Bank for
International Settlements says it is now cheaper for banks to borrow from other banks but there is
still a reluctance to lend.

It also warned that the derivatives market poses a huge risk and it wants central banks to oversee
the multi-trillion dollar market.

Finance reporter, Sue Lannin, has more.

SUE LANNIN: The Bank for International Settlements was the only multilateral institution to predict
the depths of the global financial crisis back in 2007. Now the central banks' central bank says
that investors are cautiously optimistic about the pace of economic recovery.

It says questions remain about the quality and sustainability of bank profits but markets are
showing signs of normality.

Professor of finance at the University of New South Wales, Fariborz Moshirian.

FARIBORZ MOSHIIRAN: We have to be very cautious because the BIS report is saying that market is
coming back to a normal level of operation simply because it is still relying on government-backed
debt schemes, which is supporting, if you like, fundraising by major banks in the wholesale market.

SUE LANNIN: The BIS also say the cost of borrowing for banks and financial institutions has fallen.
It reached a peak a year ago after the collapse of US investment bank, Lehman Brothers.

Bank-to-bank lending rates known as LIBOR have dropped and while bank to bank lending is still
down, it is improving.

But Fariborz Moshirian says there is still a reluctance to lend.

FARIBORZ MOSHIIRAN: One of the challenges that Australian banks are facing is that banking systems
in Europe and US are still fairly fragile.

In effect, in the US you have two tier types of banking. The large banks which have access to good
funding. The cost of funding there for large banks is 1.18 for instance as opposed to 1.98 for
smaller banks and in general in Europe banks are not lending enough or they don't lend readily.

Hence, Australian banks will find it a bit hard when they go to Europe or offshore centres to raise
capital readily.

SUE LANNIN: So is it justified when they say that funding costs have gone up because in effect,
funding costs have not gone up, they have fallen.

FARIBORZ MOSHIIRAN: While it is difficult for Australian banks to access to wholesale funding,
there is no indication that the cost of funding has gone up for them, particularly because
international financial market is looking at the Australian banking system very favourably. They
treat Australian banks very well. They don't look at our banks similar to some of the European
banks or smaller banks in the United States.

SUE LANNIN: Interest rate strategist at JP Morgan, Sally Auld, says while LIBOR rates are lower the
cost of long-term borrowing for banks is still higher than in the past.

SALLY AULD: As a bank I could certainly go out and access funding today at much lower levels or
much lower cost than I could six or 12 months ago but the problem for banks is that they work not
on the cost of the marginal but actually on the average cost of funding.

So the problem for them is that a lot of the funding that these guys did sort of two or three years
ago where spreads were very tight and it was very cheap funding, that is now all maturing and even
though credit spreads are a lot narrower than they were at the peak of the crisis, they are still
quite a lot wider than they were when we had those really, really cheap funding and really tight
credit spread so the average cost of funds for the bank is still going up.

SUE LANNIN: Sally Auld also says local banks have to pay higher interest rates for term deposits.

SALLY AULD: It has meant that the competition for deposits is starting to ramp up quite noticeably
so, you know, even though credit spreads in capital markets have come in, the actual cost or the
term deposit rates are starting to go up.

ELEANOR HALL: That is JP Morgan's interest rate strategist, Sally Auld, ending that report by Sue