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The Impact of Short- Term Interest Rates on Bank Funding Costs

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  • Azasakhe Nkcubeko Nomsobo
  • Roscoe Bertrum van Wyk

Abstract

This study examines the impact of short- term interest rates on bank funding costs in South Africa. Literature suggests that rising short- term interest rates may cause similar financial crises experienced in 2007/08 (Bonner & Eijffinger, 2013; Turner, 2013; Saraç & Karagoz, 2016). It is vital to study short- term interest rates and bank funding costs in order to achieve financial stability. The study uses quarterly time series data for the period 2000 to 2014. To estimate the regression, the study uses the Vector Autoregressive model (VAR) and the data is found stationary at first difference. The 3 months Johannesburg Interbank Agreed Rate (JIBAR) is used as a proxy for bank funding costs whilst the prime overdraft rate, 10 -year government bonds and capital ratio are used as proxies for short- term, long- term interest rates and bank capital, respectively. The results show a positive and significant long- term relationship between the variables. The results for prime overdraft rate, 10 -year government bonds and capital ratio conform to the apriori expectations. For GDP growth the results show a positive relationship which does not conform to apriori expectations. Using the variance decomposition, the study illustrates fluctuations in JIBAR was due to changes in its value and fluctuations in the prime rate are also due to JIBAR. The study presents policy options whereby regulatory efforts need to strengthen the capital buffers of banks to reduce bank funding costs and therefore reduce short- term interest rates imposed on borrowers.

Suggested Citation

  • Azasakhe Nkcubeko Nomsobo & Roscoe Bertrum van Wyk, 2018. "The Impact of Short- Term Interest Rates on Bank Funding Costs," Journal of Economics and Behavioral Studies, AMH International, vol. 10(3), pages 141-148.
    • Handle: RePEc:rnd:arjebs:v:10:y:2018:i:3:p:141-148
    DOI: 10.22610/jebs.v10i3.2323
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    References listed on IDEAS

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    1. C. Rogers, 1986. "The De Kock Report: A Critical Assessment of the Theoretical Issues1," South African Journal of Economics, Economic Society of South Africa, vol. 54(1), pages 39-47, March.
    2. Katleho Daniel Makatjane & Edward Kagiso Molefe & Roscoe Bertrum van Wyk, 2018. "The Analysis of the 2008 US Financial Crisis: An Intervention Approach," Journal of Economics and Behavioral Studies, AMH International, vol. 10(1), pages 59-68.
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    4. Beau, Emily & Hill, John & Hussain, Tanveer & Nixon, Dan, 2014. "Bank funding costs: what are they, what determines them and why do they matter?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(4), pages 370-384.
    5. Arvid Raknerud & Bjørn Helge Vatne & Ketil Rakkestad, 2011. "How do banks’ funding costs affect interest margins?," Working Paper 2011/09, Norges Bank.
    6. Jason Wong, 2012. "Bank funding – the change in composition and pricing," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 75, pages 15-24, June.
    7. Saqib Muneer & Babar Zaheer Butt & Kashif Ur Rehman, 2011. "A Multifactor Model of Banking Industry Stock Returns: An Emerging Market Perspective," Information Management and Business Review, AMH International, vol. 2(6), pages 267-275.
    8. Arvid Raknerud & Bjørn Helge Vatne, 2012. "The relation between banks' funding costs, retail rates and loan volumes: An analysis of Norwegian bank micro data," Working Paper 2012/17, Norges Bank.
    9. Seabelo T Nyawo & Roscoe Bertrum van Wyk, 2018. "The Impact of Policy Uncertainty on Macro-Economy of Developed and Developing Countries," Journal of Economics and Behavioral Studies, AMH International, vol. 10(1), pages 33-41.
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