Several mid-tier lenders are left with no choice but to follow the major banks and hold back the Reserve Bank's full rate cut from mortgage holders as their funding can no longer be repriced down.

After the big banks held back 11 to 15 basis points of the RBA's cut, Bank of Queensland, Bendigo, ING Direct, ME, and Suncorp all moved their rates in a similar fashion instead of using the opportunity to win customer goodwill. However, the mid-tier lenders did not follow the major banks' increase in 12 to 36-month term deposit rates.

Such a thing is necessary for smaller lenders because of their more onerous capital requirements, more expensive funding, and lower efficiency. They also often rely on deposits for funding, so when the official interest rate falls, their earnings on deposits and equity also decrease.

"The cost of wholesale funding has gone up and the cost of deposits hasn't gone down," said Bendigo managing director Mike Hirst. "The second thing is banks have a lot of transaction accounts and those sorts of things that don't earn high interest. So you just can't reprice it. It's a simple fact. It can't go down by 25, which is how you end up with 10."

Hirst also explained how banks intermediate between depositors and borrowers.

"Depositors typically want to lend a deposit for less than two years, but borrowers want to borrow for 25 years. The only way that happens is banks look after that maturity transformation," he said. "To do that, banks need to charge a margin. That's how they earn the money to do all of that."

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