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The Effects of Funding Costs and Risk on Banks' Lending Rates

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Author Info

  • Daniel Fabbro

    (Reserve Bank of Australia)

  • Mark Hack

    (Reserve Bank of Australia)

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    Abstract

    After falling for over a decade, the major banks' net interest margins appear to have stabilised in a relatively narrow range in recent years. In the early part of the financial crisis, margins fell to the bottom of this range, reflecting an increase in debt funding costs. Margins have since recovered a little, to around the middle of the range, as a result of some repricing of lending rates relative to these costs. In addition to the increase in the cost of debt funding, there have been other drivers of the rise in lending rates relative to the cash rate. First, the banks have increased their equity funding, which is more costly than debt finance. Second, risk margins on loans have risen to account for higher expected losses.

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    Bibliographic Info

    Article provided by Reserve Bank of Australia in its journal RBA Bulletin.

    Volume (Year): (2011)
    Issue (Month): (March)
    Pages: 35-42

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    Handle: RePEc:rba:rbabul:mar2011-06

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    Related research

    Keywords: funding costs; lending rates; interest rates; risk pricing;

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    Cited by:
    1. Leon Berkelmans & Andrew Duong, 2014. "Developments in Banks’ Funding Costs and Lending Rates," RBA Bulletin, Reserve Bank of Australia, pages 69-76, March.
    2. Chris Stewart & Benn Robertson & Alexandra Heath, 2013. "Trends in the Funding and Lending Behaviour of Australian Banks," RBA Research Discussion Papers rdp2013-15, Reserve Bank of Australia.

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