RBA: Banks funding costs have risen

The comments came in the RBA's submission to a Senate inquiry into competition in the banking sector.

"For the decade or so until mid 2007, relatively stable financial market conditions meant that spreads on the banks' various sources of funding changed little," the central bank said

in the submission, released on its website on Tuesday.

"As a result, movements in banks overall cost of funds tended to follow those in the cash rate," the RBA said in the submission, released on its web site on Tuesday.

But from mid-2007, funding costs rose, mainly thanks to big rises in the cost of deposits and long-term wholesale borrowing caused by the global financial crisis.

"The effect of these changes on banks overall funding costs has been accentuated by a shift in banks funding mix towards these more expensive types of funding," the RBA said.

The cost of deposits rose strongly as banks competed for funds.

The competition intensified around the middle of 2008, the RBA said.

"Overall, the average cost of the major banks new deposits has risen noticeably relative to the cash rate; it is estimated to be currently only slightly below the cash rate, whereas prior to the onset of the financial crisis, deposit costs were about 150 basis points below the cash rate," the central bank said in the submission.

For longer term debt, the RBA said the average cost to the major banks was estimated to have risen by about 100 basis points (one percentage point) relative to the market's expectation for the cash rate.