Long term debt funding is a relatively expensive source of funding than equity finding. This resulted in the rise in funding costs for major banks and consequently they were forced to increase their housing loan interest rates relatively more than the rise in cash. RBA have also accepted this fact and considers the existing spread as new normal standard spread. Table of Contents Table of Contents 3 Cash Rate – An Overview 4 Major Banks’ Funding and Costs of Funding 5 Pricing for Risk and Variable Housing Loan Rates set by Banks 6 Standard Variable Housing Lending Rates and Spreads 8 Conclusion 10 References 11 Bibliography 12 Cash Rate – An Overview Reserve Bank of Australia (RBA) uses cash rate as a tool to control the pressure of inflation in Australia. RBA targets to keep the inflation rate in and around 2% to 3%. This refers to the monetary policy followed by RBA. RBA’s monetary policy also includes curbing unemployment rate and assuring a stable economic growth of the country as its other objectives. When the inflation rate goes beyond the target of RBA, the cash rate is enhanced. Otherwise RBA tries to reduce the cash rate when it feels that inflation is not posing a great threat and Australia can have a faster economic growth. Since 2007, there has been a steady growth or hike in cash rate till the beginning of Global Financial Crisis (GFC) during mid 2008, when the cash rate was 7.25%. Starting from September 2008 to September 2009, in one year the cash rate fell drastically to 3% figure. This was done by RBA to help Australian economy recover from the effects of GFC. Next from October 2009 onwards, the cash rate shows a steady increasing trend (Graph 1). Present cash rate is 4.25%, which is constant for the last 5 months (Reserve Bank of Australia, n.d.). Graph 1 Source: (RBA, 2012, p.18) Major Banks’ Funding and Costs of Funding The funding bases of Australian banks are diverse. The primary sources of funding for the major banks in Australia are: a) Deposits, b) Short term wholesale debt, c) Long term debt and d) securitization. Prior to GFC, the major banks had a stable funding mix. However, GFC had an adverse effect on the costs of funding of the banks derived from different sources. Since 2007, the major banks have shifted their focus away from short term debt and securitization. The funding mix now is composed of greater percentage of deposits and long term debt (Graph 2). It is so because they are considered to be relatively safer sources of funds. However, these being relatively expensive sources of funds, the cost of funding have increased considerably relative to the cash rate and money market rates relevant to it (Brown, et al., 2010). Graph 2 Source: (RBA, 2012, p.30) Pricing for Risk and Variable Housing Loan Rates set by Banks Risks involved in lending housing loans to the borrowers are an important consideration for banks in determining the variable housing loan rate. Since 2007, the spread of banks’ lending rates on all the loan products offered by them relative to the cash rate have increased (Graph 3). The increase in these interest rates varied across different types of loans depending on the banks’ perception about the credit risk of the borrowers and the pace with which each type of loan can be re-priced
FINANCE Executive Summary Cash rate is a tool for regulating the monetary policy in Australia by RBA. It is used to control the rise in inflation rates in the country. Among other interest rates, standard variable housing loan rates are set by major banks in accordance with the changes in the target cash rate set by RBA…
Since the household costs of funds are driven by cash rate set by RBA, the standard variable housing rate can be assumed to follow the trend of cash rate. Recent developments in Australian economy show that, there has been an increased widening of the spread between major banks’ standard variable housing rate and the cash rate, since 2007.
These changes frequently affect securities unequally and can be minimized through diversification or hedging. Diversification can be done by venturing into fixed income securities with different periods while hedging is done through the swap of interest rate.
Usually the business plan serves as a “sales” document, in that it is selling the business to a prospective investor or to a finance provider such as a bank as a good investment/risk. The basic requirements for this function are the same, although the former will focus on a rate of return for the investor, while the latter will focus on the affordability of the loan required.
Besides, the implementation of such a monetary policy would see a dramatic decline in the quantity of Chinese banking system reserves. In essence, reserves include all funds that banks hold either in form of deposit balances at Central Bank reserves, loan given to banks by the central bank, loan repayments received by a bank from other banks, central bank’s direct asset purchases or cash in the banking systems ATMs or vaults which might be used in meeting the banking legal reserve requirements.
The financial health of a bank can be evaluated from the information that is derived from its financial statements.
The risk is defined as the variation of actual return from expected return. But the word ‘expected’ differs from one individual to another because different people have different appetite for risk taking propensity.
9 Reason behind Choosing Venture Capital 9 Attractiveness of this venture 10 References 13 Bibliography 14 Appendices 15 Part1. Description about the Business The business is about opening a fitness center in Manchester. The fitness center will be situated at the north of University of Manchester.
The governments of respective countries has implemented a number of policies related to this .But The practice of imparting and accepting the fund always invites criticism as the opponents draw attention regarding imperfections, adverse results such as capital intensity of such funds, inappropriate technology ,the possible adverse on income distribution etc.
Some of these operations that require funds include paying the short-term requirements and getting involved in the affairs of long-term investment plans for the firm. In the event the firm is unable to acquire such funds, the firm