AUSTRALIAN banks’ funding structures are proving to be more resilient to periods of financial stress than their European counterparts, a central bank official says.

A key reason for the current financial market volatility is the increased funding costs for some banks, particularly in Europe.

Reserve Bank of Australia (RBA) assistant governor (financial markets) Guy Debelle said while some European governments struggle financially there has been pressure on bank funding.

“The cost of funding for European banks generally has risen, while many banks in the European periphery countries have all but been locked out of funding markets,” Dr Debelle said, addressing the 24th Annual Finance & Treasury Association Congress in Sydney.

“As an illustration of this, the cost for banks to borrow euros from each other has risen sharply since significant concerns re-emerged about Greece in May this year.”

To help solve this problem the European Central Bank (ECB) is providing three month funding to banks in unlimited amounts.

“That is, banks can source unlimited euros from the ECB at fixed interest rates for periods of at least one year,” Dr Debelle said.

“Thus European banks should not have difficulty in sourcing euro funding for some time to come, provided they hold the appropriate collateral.

“Since April this year, the ECB’s lending to banks has grown by about 180 billion euros ($A242.21 billion) (or 40 per cent) as a result of these operations, with the bulk of the increase occurring since July.”

In contrast, the RBA’s funding to Australian banks has not changed in recent times.

“Deposits with the RBA have remained around $1 billion for over 18 months now,” Dr Debelle said.

“More generally, we see little sign of strain or counterparty concern in the local interbank market.”

To further help with bank funding, federal parliament last week passed legislation permitting the issuance of covered bonds by Australian banks.

“As a result, one might expect to see some covered bond issuance by local banks in the near future, given the apparent preference of global investors for this product in the current environment,” Dr Debelle said.

Australian banks are much better placed to ride out periods of volatility than in the past, he said.

“Deposit growth has outstripped credit growth for more than two years now, thereby reducing the banks’ need to access wholesale debt markets, and … banks have increased their use of longer-term funding,” he said.

He said the cost of offshore funding for Australian banks has also fallen in recent times.

This is helped by the fact that the funding Australian banks raise offshore, in US dollars predominantly, is swapped back into Australian dollars.

“That is, the Australian banks are funding Australian dollar assets, not US dollar assets,” Dr Debelle said.

He said Europe’s problems with bank funding in recent years are easing thanks to policy measures by the ECB, and Australian banks are in a stronger position because of similar measures taken here.

“In effect, provided they have appropriate collateral, European banks should be able to meet their liquidity needs in the period ahead both in euros, and in US dollars,” Dr Debelle said.

“The Australian banks’ funding structures are considerably more resilient to periods of stressed markets than they were previously, given the changes that have occurred over recent years,” Dr Debelle said.