So other than cash deposits where do the banks get excess funds for expenditure for mortgage lending and business lending---long term.
If they need say 5 billion who do they negotiate with for the cash?
They would negotiate a term for X years.
As I see it they would have fixed loan costs at any one time or is it variable and how does it fluctuate.
Who governs this for the banks?
While Im at it what does the RBA function as?
When they raise interest rates that interest rate is for you and I through the bank loans we have.Effectively giving banks a pay rise if they are paying a fixed rate for loans they already have.
The interest rate set by the RBA is generally used for short-term funding, mostly for emergencies when a bank needs to tap into some funds to maintain its' minimum reserve (i.e. every bank must maintain a minimum amount of capital in order to service cash withdrawals and comply with government regulations. Should they drop below this minimum capital level, they must borrow it from another bank or the RBA).
Banks generally do not borrow from the RBA for long term funding, except for exceptional situations, such as bailouts or to mitigate the risk of insolvency/bankruptcy. They generally never borrow long term to supply mortgages or anything of that nature. So the RBA interest rate should technically have no direct impact on a bank's mortgage rate, as it's not used as a source of funds for mortgages.
So while the RBA isn't used to back mortgages, it is still classified as a source of 'wholesale funds'. Other sources can include federal and public funds, deposits, as well as foreign deposits/banks.
To answer your second point, banks will have a mixture of fixed and variable loans from wholesale funding sources. So when those funding sources go up in price, they pass on the price rise to the customer in order to maintain margins.
In the case of the RBA, it's used mainly as a tool by the banks to help soften the rise in the eyes of the public. The reality is, that wholesale funding has been increasing before the RBA move - but the banks are hesitant to pass on the rise to the customer until the RBA make an increase so that they don't look as bad in front of the public (also wholesale funding costs fluctuate too, so they wait for some sign of stability before increasing/decreasing).
Imagine wholesale funding goes up 0.25 b.p., in 2 weeks. The banks are technically well within their rights to lift interest rates by the same amount as soon as that happens- but they wont, because the public will accuse them of price gouging, greediness, etc when the reality is that their funding costs have gone up. What they'll do is wait for the inevitable increase from the RBA and then announce on the same day/week that the bank is increasing its' interest rate too (by enough to cover the RBA increase and the wholesale funding 0.25 b.p. increase from before - therefore it appears that the bank is increasing its' mortgage rate in line with the RBA increase, rather than independent of it)
This is what the CBA did because wholesale funding costs on the whole have increased more than what the RBA o/n rate has changed.
