Cash rate, loan rate, equity funding Essay Example | Topics and Well Written Essays - 1000 words

Cash put, bestow rate, equity funding - Essay ExampleThis nominate be attributed to the plusd cost of debt funding for the major banks in Australia. Study of major banks fund composition shows that the banks are shifting their focus towards deposits and long term borrowings more(prenominal) and there has been a decline in share of short term debt in banks funding. Amongst others, higher deposit rates have contributed significantly towards increase in debt funding costs for banks. Although the share of equity has also increased in the banks funding composition but it has not contributed much towards changes in housing impart rates, since they are less risky. Until recently, in 2011, the spread between standard housing loan rate and capital rate has reduced by about 10 basis points due to the increase in discounts offered by the banks on new mortgages, but its only a small reduction compared to the overall spread. mesa of Contents Table of Contents 3 Widening of the spread betwe en the major-banks standard inconsistent housing loan rate and the RBAs cash rate since 2007 4 RBAs Cash tread 4 Variable Housing Loan Rate and Cash Rate 4 Composition of Banks Funding 5 Cost of Debt and Equity Funding 5 Pricing for Risk and Banks Housing Loan Rates 6 Conclusion 6 List of Graphs 7 References 10 Bibliography 12 Widening of the spread between the major-banks standard changeable housing loan rate and the RBAs cash rate since 2007 RBAs Cash Rate The key objective of RBAs monetary constitution is to lower the inflation rate, targeting around 2 to 3%. Other objectives of RBAs monetary policy involve low unemployment rate and maintaining a stable growth of Australian economy. Cash rate is the primary tool which is used by RBA to regulate the monetary policy in the country. It increases target cash rate when the inflation pressure is in excess of the RBAs target and it decreases the target cash rate when the economy can grow at a faster rate without creating any inflat ion problem (Lowe, 1995, p. 3-15). If we look at the history of RBAs cash rate, it can be inferred that there has been a steady increase in cash rate from 2007 till mid 2008, which was the beginning of Global Financial Crisis (GFC). Then there was a sharp decline in cash rate during the period of mid 2008 till April, 2009. The cash rate was as low as 3% and move to be so till September, 2009. Since October, 2009, there had been a steady increase in cash rate (Graph 1). Until recently there had been minor cuts in cash rate and is at 4.25%, as of today (RBA, n.d.). Variable Housing Loan Rate and Cash Rate The trend of standard variable housing loan rates is believed to follow the trend of cash rate. It is so because the household cost of funds are driven by the cash rate. If we compare the standard variable housing loan rate with cash rate, we find an overall strong correlation between these two rates over the years but with more or less anomalies in between (Graph 2). If we watch c losely, it can be found that there has been an increasing spread between the major banks standard variable housing loan rate and the cash rate since 2007. This increase in variable housing loan rate by major banks relative to the cash rate can be attributed to the increase in banks cost of debt funding. In addition to this, higher equity funding costs and increase in expected losses have also attributed to this widening of spread between the two rates. Until recently, in 2011, the spread has reduced by about 10