Term deposit 'war' is hurting banks, says RBA

The fierce competition among the banks for retail deposits is driving up their funding costs, the Reserve Bank (RBA) has said.

An RBA submission to a Senate inquiry into banking competition, which has been obtained by the Australian, states that such competition has led to term deposit prices being set 70 basis points higher than equivalent-term debt – a sharp contrast with the pre-global financial crisis era when term deposit prices were up to 60 basis points below the debt price.

Consumers have been encouraged to compare term deposits in recent years as the banks have to looked to increase retail deposit bases and reduce their reliance on costly wholesale funding markets.

However, the RBA noted that such a strategy has also led to escalating term deposit costs for the banks as interest rates have risen with the competition.

"Since mid-2007 the higher costs of deposits has made the largest contribution to the overall increase in funding costs, reflecting their large weighting in total funding and the 125 basis point rise in deposit rates relative to the cash rate," said the submission.

The statement comes as RBA governor Glenn Stevens this week urged Australians to save up during the current age of "prosperity".

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