Term Deposit Vs. At call rates

In a recent speech by RBA Assistant Governor Malcolm Edey titled “Competition in the Deposit Market” he referred to the fact that there has been structural, long term changes to the funding mixes of the big banks (and ADIs in general) and that higher term deposits are likely to persist for some time.

It is clear that since the advent of the GFC, competition for term deposits has heated up and investors have been the big winners. However, as Mr Edey points out, this “trend towards increased competition in the deposit market...is not something new. It has been an ongoing consequence of the way the market forces have evolved in a deregulated environment...It’s also clear that the trend has been amplified by factors flowing specifically from the financial crisis”

Pre-GFC, term deposit ‘special’ rates were generally at a margin below BBSW (around 50bps below on average). As the chart below demonstrates this has radically changed as a result of the GFC and now the same measure is showing ‘special’ term deposits from the banks around 100bp above BBSW.

A critical reason for the increased competition in the term deposit market has been the fact that alternative funding sources such as wholesale funding, particularly offshore debt, and securitisation markets, have either closed or became significantly more expensive. This meant deposit funding had to fill the void. Mr Edey noted that there were two big factors at play.

“First, the crisis has focused the attention of investors, regulators, rating agencies and, not least, the banks themselves, on the need for stable sources of funding.” Further, he states that “markets have clearly been taking a general view that banks should source more of their funding from deposits rather than short-term wholesale liabilities, and there is no doubt that this has been a factor in market pricing in the post-crisis environment. It is also clear that prospective regulatory developments are going to put more emphasis on stable deposit funding. A second factor is that the crisis made non-deposit sources of funding more expensive, or in some cases more difficult for lending institutions to obtain, than was previously the case”.

The closure of the securitisation market was particularly negative on regionals and smaller ADIs which had a much higher reliance on this source of funding. All this led to the deposit market becoming more important and resulted in significantly increased competition. Throw in the government guarantee which essentially removed the credit risk and you had approximately 160 homogenous deposit providers that could only compete on price.



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