Executive summary:

Since 2007 Australian major-banks have become more independent in their composition of funding and because of this, the RBA cash rate is no longer the ultimate determinant in banks lending rates.
Banks pay more for debt financing so they factor in these costs when determining lending rates. The widening of this spread means more liquidity and more availability to funds, as well as a decrease in the cost of funding because of the heavy reliance on deposits, ultimately emphasizing banks independence of the cash rate post Global Financial Crisis. Widening of wholesale debt spreads have illustrated a slowdown in economic activity across the global economy and shows the concerns those investors have with when investing with Australian major-banks (Deans & Stewart 2012).

Introduction

A variety of factors have contributed to the increasing spread of the major Australian banks since 2007. The most important of these factors is the composition of major banks funding and the cost of this funding, which involves the way of which banks fund their liabilities (Deans & Stewart 2012). Since the 2007 Global Financial Crisis (GFC) banks have become more reliant on deposits and less reliant on short and long-term wholesale debt financing. This is due to the fact that it is cheaper and poses less risk for the banks. The change in the composition of banks financing have played a vital role in the increasing spread of variable housing loan rates relative to the cash rate, as well as broader factors that do not have any effect to the cash rate such as increases in competition from other banks and overseas investment.

Composition of Funds
Australian major banks have a diverse funding mix; of which, these funds are sourced from deposits, and short and long-term wholesale debt. Shifts in the composition of these funds have seen the major-banks move from