Banking squeeze to make funding more expensive for small businesses

In coming years, banks will have to pay more and more to secure their financing, which will result in higher fees for loans, according to a new study.

The Australian Centre for Financial Studies will tonight formally launch Funding Australia’s Future, a report compiled in consultation with Australia’s major banks and funding bodies outlining some of the structural challenges making life difficult for the Australian banking industry.

The report highlights a number of challenges to banks, including rising cost of deposits and the greater share of money being stored in superannuation accounts.

Professor Rodney Maddock, one of the authors of the report and an economics professor at Monash University, told SmartCompany the flow of funds within the Australian economy is changing.

“It’s become more expensive for funds to get access to money,” he says. “Since the global financial crisis, the amounts paid in interest to depositors holding money in banks has risen, while international wholesale funding markets have become more expensive for banks.

“The consequence is that banks will charge people more for the money they lend,” Maddock says. “Because small businesses are very dependent on banks for funding, I think it’s inevitable that funding costs will rise.”

Another aspect making funding more expensive for the banks is the rise of superannuation, which has resulted in large and growing amounts of money being held in superannuation accounts.

“Banks and superannuation funds are different ways in which our savings get accumulated and then used. While banks have had a fundamental role in financing, for instance, small businesses, superannuation funds don’t play in that space,” Maddock says.

Accenting this shift is the increased competition for domestic savings posed by super funds, which forces banks to offer higher interest payments to compete.

“The rise of superannuation funds means we’ve got to find good ways to use the money they accumulate within the economy. Who funds what is going to have to change.”

The report is the first stage of an ongoing research project. The second stage will look at these issues in more detail, while the policy options that can be used to address these issues will be raised in stage three.