Deposit-takers back in fashion
Australian Financial Review
Monday November 16, 2009
Old school bankers, currently enjoying a return to favour, have long emphasised the importance of the liability as well as the asset side of the balance sheet - that is deposits, bills, bonds and so on - not just loans. Liability management is about to enjoy not just greater attention from bank boards and management but from regulators and policymakers. Indeed, former Westpac boss David Morgan delivered an eye-opening address to the superannuation industry this week where he forecast a policy shift enhancing the attraction of bank deposits at the expense of super.The financial crisis delivered a blunt lesson that there are liabilities and there are liabilities. A financial institution like RAMS or Northern Rock which utilised a capital market to borrow and then on-lent the money for a much longer period of time is a riskier proposition than a bank or building society which borrows funds from retail investors via savings accounts.A UBS which on-lends each dollar of deposit 50 times or so is more risky than a Big Four bank which is only leveraged 10 times or so.And we can take from Australian Prudential Regulation Authority chairman John Laker that liability management is now something that financial institutions should not only take seriously but will be forced to take seriously.Laker spoke last week at the annual conference for Abacus, the credit union and building society industry group. Diversification of funding, whether through securitisation or international bond issues, is limited for this group. Particularly when government guarantees unwind.Yet "mutual authorised deposit-taking institutions cannot take their strong deposit franchise for granted because competitors are also very alert to the benefits of a stable and diversified retail deposit base", he said.Equally relevant was the necessity to parse deposits very carefully.Laker noted "the behaviour of traditional retail deposits compared to potentially more volatile deposit sources such as quasi-wholesale deposits or internet-style deposits"."We have been a little surprised that some mutuals are arguing that large deposits from organisations such as local councils and RSL clubs should be considered to be routine retail deposits."This emphasises the difference between more volatile online deposits and - traditionally cheap for banks - funds left in transaction accounts. Understanding the stability and real cost of deposits will be an important discipline for financial institutions post-crisis.Pre-mandated super, Australian banks funded their lending from Australian deposits. Now that the bulk of savings sits in super accounts, lending needs to be funded with a sizeable slab of offshore borrowing.Morgan doesn't think the Henry tax review will ignore this critical issue.Whatever happens with fiscal policy, deposits are in the highest demand for more than a decade. In terms of a pre-tax margin above inflation, savers have rarely had it so good - well, some.While retail lending rates have basically moved in line with Reserve Bank rates, deposit rates are enormously more varied. Some at-call accounts, which savers can shift money in and out of by the second, have not moved. Meanwhile, there are generous offers out there for money that can be locked in for an extended period of time.This is, of course, the market working as it should but there's also an interesting collateral development. The cheapest deposits for banks are at-call, money that sits in transaction accounts, where people hold their salary and use ATMs and debit cards to access funds.Historically, these sorts of accounts have paid little or no interest while charging a range of account keeping fees onto which are loaded a raft of charges for use - and misuse.This has been the situation for the last decade and a half since banks started charging account fees, when margins on mortgages, long used to cross-subsidise accounts, were slashed by competition.Now, though, with National Australia Bank's aggressive move on account penalties, we are moving back into an environment where cross- subsidies are growing again.As one bank executive argues: "We are now unravelling all the rational pricing initiatives of the last decade and heading back to the less transparent model. It looks good now but we will get hammered as those lost revenue streams are recovered by further out of cycle rate increases."In banking, like elsewhere, the prices of assets, liabilities, fees and marketing are all interrelated.acornell@afr.com.au
© 2009 Australian Financial Review
