Small lenders beware

The retreat in interest rates set in train by the dramatic events on domestic financial markets this week will lower the funding costs of smaller local banks and hence modestly improve their profit margins, while it nibbles at the revenues earned from surplus funds placed on the interbank market by their bigger rivals.

If that sounds like a break for beleaguered small banks, it is. But the jury is out on how long the relief will last. And, meanwhile, a raft of far more enduring competitive pressures in the industry remain, all of which collectively spell danger for small lenders in an environment in which scale is becoming steadily more important.

Such cautions aside, however, one outcome of the latest turmoil on markets has been the collapse of interest rates on the wholesale money market to all-time lows since data records have been maintained. Three-month Hong Kong Interbank Offered Rates (Hibor) plunged to just 0.88 per cent. Tha...