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Aussie superfunds threatens bank funding

Australia’s superannuation industry may soon be bigger than the country’s banking sector, a change that could threaten bank deposits and the way the economy is financed.

At the Funding Australia’s Future Forum, prominent academics and industry experts came together to discuss the influence of superannuation on Australia’s financial system. Professor Kevin Davis from the University of Melbourne said the growth in superannuation will result in less money going into bank deposits and could affect the way the economy runs.

With interest rates so low (and potentially going lower in the future) we are seeing banks find other alternatives to funding as more and more deposits are pulled out by customers who seek better returns in equities and property. ANZ (ASX: ANZ) and Westpac’s (ASX: ANZ) recent capital raising is an example of what we can expect to see in the economy in future years.

According to the Australian Financial Review, Professor Davis said instead of banks using their balance sheets to lend money they will try to encourage corporate customers to enter into debt and equity markets to raise funds. According to Professor Rod Maddock of Monash University, “the rising cost of deposit funding threatened to make the banks less competitive versus other agents in the financial services sector”.

The benefits of investing through self-managed super funds are only expected to get better for individuals as the Superannuation Guarantee contribution rises in coming years. This has also raised a number of issues for the economy as the number of SMSFs continues to grow. The $500 billion in SMSFs is invested much differently than funds in managed accounts and could present serious issues and risks for investors and the economy in the near future. Currently SMSFs have less than 1% invested in offshore equities compared to 34% in the broader sector, Professor Maddock noted that “it looks wrong, unstable and has to change”.

Foolish takeaway

When interest rates are low and the economy slows, bank profits will suffer. As lending conditions tighten and unemployment rises, banks face liquidity issues because they struggle attract depositors with minimal or no interest in accounts whereas equities and property offer a return. This is something the banks have dealt with for years. However, with SMSFs now growing in popularity, banks might face even more funding problems and will have to find new ways to entice customers.

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ. 

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