AUSTRALIA’S largest banks are struggling to cope with a spike in demand for offshore services and a clampdown on foreign exchange.
Key points:RBA says its foreign exchange units are now underperforming in real terms since the global financial crisisRBA Governor Paul Martin says the Australian dollar is still recovering after a recent dipThe Reserve Bank has cut interest rates and said it is prepared to support the Australian currencyRBA has cut its foreign currency lending rate to 0.2 per cent, from 0.4 per cent in April, and said its interest rate risk-free lending rate is set to stay at 0.5 per cent.
But it has also raised its benchmark lending rate from 0 to 0,500 per cent to make sure that it is not underperforming.
That is in spite of a strong performance in the foreign exchange market since the financial crisis.
The RBA has warned it could see foreign currency borrowing and lending rise again over the next year or so.
And it has raised its rate for banks with more than $2 billion in assets.
Its benchmark rate for loans in this sector is set at 0,125 per cent and it has cut it by 25 basis points to 0125 per day.
“It’s not just a matter of the dollar,” said RBA Governor Richard Black.
The dollar is now recovering from the global economic crisis and the bank says it is now fully functioning.
“[The foreign exchange rate] is still down to 0.,000.
It’s not like it was in 2010 or 2014,” he said.
But the Bank of Australia said it was now adjusting its foreign borrowing and borrowing rate to reflect the rising level of interest rates, and that it was looking to support Australian assets by lending at 0 per cent more in real dollars than it had previously.RBA’s foreign exchange unit has been struggling for months with the global market, with its foreign and local currency reserves declining from $1.7 trillion in December to $878 million as a result of the financial meltdown.RBS’ foreign exchange reserves have fallen to $1,050 million, while it has lost more than 1,500 jobs since March.
It has also been struggling with its ability to access credit, with more Australians now using their home credit cards than in recent years.RBC said its foreign deposit business had now experienced a “substantial reduction” in lending and said the impact on its foreign reserves was “significant”.
“RBS is now able to access some of its customers’ foreign deposits as a source of funding,” it said in a statement.
However, it said it had also been forced to close the bank’s overseas cash market operations because of a “sharp” decline in foreign currency flows.RBI Governor Paul Martins said the bank had been struggling to find a way to access the funds needed to fund its business and was now in a difficult position.
“The foreign reserve position is very tight in the domestic financial system,” he told reporters.
RBS has said it has been unable to find any funding from overseas as a major source of liquidity in recent months.”RBI is unable to access funds from the overseas markets in the short term due to a large decline in the Australian domestic currency, and we are also unable to raise foreign currency to support our operations in the current environment,” it had said in December.
A report from the Reserve Bank’s foreign currency economist said this had led to a sharp decline in lending activity.
He said it also meant that foreign currencies were being used by foreign businesses and households to buy dollars, causing the value of the currency to fall.
“These movements in the value and availability of foreign currencies may have been more pronounced in recent quarters, when foreign currency reserves were weaker than in the last two years,” the report said.
“If this trend continues, the decline in dollar-denominated assets may not be fully offset by an increase in the demand for foreign currencies.”
The Reserve of Australia has been asked by the RBA to consider reducing the rate it charges banks for the use of foreign currency and for the foreign currency trading in the local currency market, as well as increasing the rate of interest that it applies to the foreign cash market.ROBERT BROWN: Foreign currency volatility has risen over the past yearROBERTS REPORTS: Key points:AUSTRALIAN currency has fallen to a four-year low of $1 per Australian dollar, but it is still rising, RBA saysRBA said it expected foreign currency deposits to be about half their size in 2019, but that this was no longer the case.
It had said it would cut interest rate by a quarter point, from 1 per cent now to 0 per per cent over the coming 12 months, but would only apply the rate change to loans that were less than $1 million in the next 12 months