Australian Bank Mortgage Price-Setting Behaviour Pre- and Post-GFC: Does International Funding Cost Matter?

41 Pages Posted: 3 Jun 2017 Last revised: 18 Jul 2017

See all articles by Quynh Holland

Quynh Holland

Griffith University - Department of Accounting, Finance and Economics; UFM Ho Chi Minh, Vietnam

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics

Eduardo Roca

Griffith University

Date Written: June 1, 2017

Abstract

This study is motivated by an ongoing controversy over banks’ interest rate setting conduct in the Australian mortgage market. We examine heterogeneity in the response of variable interest rates on owner-occupied housing loans to the ‘cost of funds’ rates, including the cash rate and the cost of overseas borrowing. The stability of the pass-through mechanism in the post-crisis period is further evaluated in comparison with the pre-crisis epoch. Our results highlight that Australian banks set their mortgage interest rates on funding costs. We also confirm a declining transmission of the cash rate after the GFC consistent with previous studies. Importantly, the close alignment of mortgage rates and international funding cost exists before and after the crisis. Banks partially transmit changes in the cost of offshore funding to their home-loan rates in both short and long term. Short-term pass-through coefficients of the offshore funding cost are heterogeneous, while the long-term traverses are fairly homogeneous. The fuller sizes of these long-term coefficients in the post-crisis subsample signify that Australian banks’ mortgage price-setting practices have been relatively stable after the crisis.

Keywords: Mortgage interest rate, pass-through, funding cost, Australian banks, global financial crisis, PMGE model

JEL Classification: G21, E43, E58

Suggested Citation

Holland, Quynh Chau Pham and Liu, Benjamin and Roca, Eduardo, Australian Bank Mortgage Price-Setting Behaviour Pre- and Post-GFC: Does International Funding Cost Matter? (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2979069 or http://dx.doi.org/10.2139/ssrn.2979069

Quynh Chau Pham Holland (Contact Author)

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

UFM Ho Chi Minh, Vietnam ( email )

2/4 Tran Xuan Soan Road. Tan Thuan Tay Ward, D.7
Ho Chi Minh
Vietnam

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

Eduardo Roca

Griffith University ( email )

170 Kessels Road, Nathan
Queensland
Brisbane, 4111
Australia
(07) 373 57583 (Phone)

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