ANZ Bank has chosen a different course to National Australia Bank by increasing its variable home loan rate by 20 basis points rather than the 12 basis points announced by NAB last week. Whether the difference is tactical or relates to more fundamental issues is impossible to determine.

One suspects there is an element of the tactical. NAB, as the first major bank to pass on some of the increased funding costs flowing as a result of the US sub-prime crisis, was presumably aware that it would bear the brunt of any backlash. It would have made sense to be careful about the magnitude of the change in such a politically sensitive area.

ANZ, as second mover, may feel that it is less likely to get beaten up, despite the bigger increase – particularly if Commonwealth and Westpac take the opportunity to pass on 20 basis point increases of their own. Or perhaps ANZ’s circumstances are different to NAB’s. One of the realities of today’s banking system is that while the big Australian banks are similar, they aren’t the same.

There is no dispute that since the sub-prime crisis emerged in July last year short-term wholesale funding costs for the banks have both risen and have been very volatile. At times they have been as much as 70 basis points higher than pre-crisis. They dropped back to about 15 basis points before soaring again and today remain about 30 basis points ahead of where they started.

The variable rate home loans are politically sensitive and it has been rare to see them moved out of step with the Reserve Bank’s official rates. Given the coincidence of the sub-prime crisis and last year’s Federal election campaign there was no prospect that the banks would pass on the higher costs until well after the election.

In some respects it also suited the banks, for a while, to take advantage of the higher cost and lower levels of liquidity in global markets to win back market share from the non-bankers lenders, which have been ravaged by the abrupt withdrawal of their access to wholesale funding. For the non-banks who can raise some funds, the cost renders them almost uncompetitive.

For a decade or so the non-banks had, perversely, been able to operate with a wholesale funding model that gave them a competitive advantage over the traditional banks. That’s now gone and the big banks have hit back.

The trade-off for their increased market share is, however, lower margin. While there has been some shallow criticism of NAB for increasing rates fresh from a $4.4 billion 2007 profit, that needs to be seen in context – NAB has $540 billion of assets, so the result represented a return of less than one per cent on its asset base. The gearing in banks means that relatively small shifts in returns can translate to big swings in their profitability – in either direction.

NAB and now ANZ self-evidently have decided that they’ve won sufficient share from the non-banks and that they now need to recover some of the foregone margin.

How much of the increased funding costs will be offset by the rate rises, however, is impossible to assess.

While there is no doubt that wholesale funding costs have increased significantly, wholesale markets aren’t the only source of funding for the majors, all of whom have big retail deposit bases. While competition for retail deposits is quite intense, the cost of retail funding isn’t as volatile as wholesale money.

Also, the banks as a group have already passed on some of the higher costs through increases in the cost of their fixed rate loans, personal loans, credit cards and business lending and by lagging rises in retail deposit rates. They don’t need to recover the full amount from their variable rate home loan books.

Beyond that, each of the banks have different loan portfolio. It is conceivable, although perhaps improbable, that the difference between the NAB and ANZ rate rises equates to actual differences in the net increases in their funding costs. It is more likely, given that all the majors do have broadly similar profiles, that both are still absorbing some element of the increases.

The one thing ANZ may have done by choosing not to simply emulate NAB is to reduce the chances of another 25 basis point rise in official rates next month. The Reserve Bank has indicated that rises in market rates might obviate the need for it to increase official rates. NAB’s 12 basis point rise might not have swayed it; ANZ’s 20 basis points ought to have a greater impact on household behaviour, particularly if Commonwealth and Westpac choose to fall into online behind ANZ rather than NAB.

This article originally appeared in Business Spectator.