IDEAS home Printed from https://ideas.repec.org/a/boe/qbullt/0156.html
   My bibliography  Save this article

Bank funding costs: what are they, what determines them and why do they matter?

Author

Listed:
  • Emily Beau

    (Bank of England)

  • John Hill

    (Bank of England)

  • Tanveer Hussain

    (Bank of England)

  • Dan Nixon

    (Bank of England)

Abstract

A bank needs to finance its activities, and the cost of bank funding affects a wide range of economic variables with important implications for both monetary and financial stability. This article sets out what bank funding costs are in simple terms, using an analogy of two buckets on a pair of scales to help explain the dynamic nature of bank funding and bank lending. It also introduces a simple framework for analysing the main drivers of funding costs.

Suggested Citation

  • Emily Beau & John Hill & Tanveer Hussain & Dan Nixon, 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.
    • Handle: RePEc:boe:qbullt:0156
    as

    Download full text from publisher

    File URL: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/bank-funding-costs-what-are-they-what-determines-them-and-why-do-they-matter.pdf?la=en&hash=5D1323B1600711DB629DE781CBAE9E798A2B79FF
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Richard Button & Silvia Pezzini & Neil Rossiter, 2010. "Understanding the price of new lending to households," Bank of England Quarterly Bulletin, Bank of England, vol. 50(3), pages 172-182.
    2. Michael McLeay & Amar Radia & Ryland Thomas, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
    3. Rhiannon Sowerbutts & Peter Zimmerman & Ilknur Zer, 2013. "Banks’ disclosure and financial stability (110KB)," Bank of England Quarterly Bulletin, Bank of England, vol. 53(4), pages 326-335.
    4. Venetia Bell & Nick Butt & James Talbot, 2013. "The Bank of England Bank Liabilities Survey," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 68-76.
    5. Paul Tucker & Simon Hall & Aashish Pattani, 2013. "Macroprudential policy at the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 192-200.
    6. Marc Farag & Damian Harland & Dan Nixon, 2013. "Bank capital and liquidity," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 201-215.
    7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    8. Andrew Bailey & Sarah Breeden & Gregory Stevens, 2012. "The Prudential Regulation Authority," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 354-362.
    9. Rashmi Harimohan & Benjamin Nelson, 2014. "How might macroprudential capital policy affect credit conditions?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(3), pages 287-303.
    10. Nick Butt & Alice Pugh, 2014. "Credit spreads: capturing credit conditions facing households and firms," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 137-148.
    11. Rohan Churm & Amar Radia & Jeremy Leake & Sylaja Srinivasan & Rishard Whisker, 2012. "The Funding for Lending Scheme," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 306-320.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Madaschi, Christophe & Pablos Nuevo, Irene, 2017. "The profitability of banks in a context of negative monetary policy rates: the cases of Sweden and Denmark," Occasional Paper Series 195, European Central Bank.
    2. Md Jahir Uddin Palas & Fernando Moreira, 2023. "Government Assistance and Banks' Funding Cost," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 143-183, October.
    3. Marisa Basten & Antonio Sánchez Serrano, 2019. "European banks after the global financial crisis: a new landscape," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 51-73, March.
    4. Iñaki Aldasoro & Kyounghoon Park, 2018. "Bank solvency risk and funding cost interactions in a small open economy: evidence from Korea," BIS Working Papers 738, Bank for International Settlements.
    5. Wang, Zhanhao & Zhao, Hong & Li, Lingxiang, 2022. "The positive side of bank wealth management products: Evidence from bank lending rate," Journal of Financial Stability, Elsevier, vol. 58(C).
    6. Ćehajić, Aida & Košak, Marko, 2021. "Macroprudential measures and developments in bank funding costs," International Review of Financial Analysis, Elsevier, vol. 78(C).
    7. Ching-Wai (Jeremy) Chiu & John Hill, 2018. "The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 113-158, March.
    8. Tran, Dung Viet & Nguyen, Cuong, 2023. "Policy uncertainty and bank’s funding costs: The effects of the financial crisis, Covid-19 pandemic, and market discipline," Research in International Business and Finance, Elsevier, vol. 65(C).
    9. Tim Olds & Daan Steenkamp, 2021. "Estimates of bank-level funding costs in South Africa," ERSA Working Paper Series, Economic Research Southern Africa, vol. 0.
    10. Sinem Hacıoğlu Hoke & George Kapetanios, 2021. "Common correlated effect cross‐sectional dependence corrections for nonlinear conditional mean panel models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(1), pages 125-150, January.
    11. Dent, Kieran & Hacıoğlu Hoke, Sinem & Panagiotopoulos, Apostolos, 2021. "Solvency and wholesale funding cost interactions at UK banks," Journal of Financial Stability, Elsevier, vol. 52(C).
    12. 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.
    13. Aldasoro, Iñaki & Cho, Chun Hee & Park, Kyounghoon, 2022. "Bank solvency risk and funding cost interactions: Evidence from Korea," Journal of Banking & Finance, Elsevier, vol. 134(C).
    14. Hałaj, Grzegorz, 2018. "System-wide implications of funding risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 1151-1181.
    15. Opoku Mensah, Mary & Agbloyor, Elikplimi Komla & Harvey, Simon Kwadzogah & Fiador, Vera Ogeh, 2017. "Sovereign credit ratings and bank funding cost: Evidence from Africa," Research in International Business and Finance, Elsevier, vol. 42(C), pages 887-899.
    16. Kapuściński, Mariusz & Stanisławska, Ewa, 2018. "Measuring bank funding costs in the analysis of interest rate pass-through: Evidence from Poland," Economic Modelling, Elsevier, vol. 70(C), pages 288-300.
    17. Garreth Rule, 2015. "Understanding the central bank balance sheet," Handbooks, Centre for Central Banking Studies, Bank of England, number 32, April.
    18. Rashmi Harimohan & Michael McLeay & Garry Young, 2016. "Pass-through of bank funding costs to lending and deposit rates: lessons from the financial crisis," Bank of England working papers 590, Bank of England.
    19. Mariusz Kapuściński & Ewa Stanisławska, 2016. "Interest rate pass-through in Poland since the global financial crisis," NBP Working Papers 247, Narodowy Bank Polski.
    20. Luong, Thi Mai & Pieters, Russell & Scheule, Harald & Wu, Eliza, 2020. "The impact of government guarantees on banks' wholesale funding costs and lending behavior: Evidence from a natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    21. Cadamagnani, Fabrizio & Harimohan, Rashmi & Tangri, Kumar, 2015. "A bank within a bank: how a commercial bank’s treasury function affects the interest rates set for loans and deposits," Bank of England Quarterly Bulletin, Bank of England, vol. 55(2), pages 153-164.
    22. Thi Mai Luong, 2020. "Selection Effects of Lender and Borrower Choices on Risk Measurement, Management and Prudential Regulation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2020, January-A.
    23. Hałaj, Grzegorz, 2018. "Agent-based model of system-wide implications of funding risk," Working Paper Series 2121, European Central Bank.
    24. Nguyen, Minh Nhat & Tran, Dung Viet & Nguyen, Van, 2024. "Do banks with more able managers get better funding costs?," Finance Research Letters, Elsevier, vol. 61(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shakir, Tamarah & Tong, Matthew, 2014. "The interaction of the FPC and the MPC," Bank of England Quarterly Bulletin, Bank of England, vol. 54(4), pages 396-408.
    2. Rashmi Harimohan & Benjamin Nelson, 2014. "How might macroprudential capital policy affect credit conditions?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(3), pages 287-303.
    3. Nick Butt & Alice Pugh, 2014. "Credit spreads: capturing credit conditions facing households and firms," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 137-148.
    4. James Cloyne & Ryland Thomas & Alex Tuckett & Samuel Wills, 2015. "A sectoral framework for analyzing money, credit and unconventional monetary policy," Bank of England working papers 556, Bank of England.
    5. Alice Alphandary, 2014. "Risk managing loan collateral at the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 190-201.
    6. Shiv Chowla & Lucia Quaglietti & Lukasz Rachel, 2014. "How have world shocks affected the UK economy?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 167-179.
    7. Michael McLeay & Amar Radia & Ryland Thomas, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
    8. Marc Farag & Damian Harland & Dan Nixon, 2013. "Bank capital and liquidity," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 201-215.
    9. Rashmi Harimohan & Michael McLeay & Garry Young, 2016. "Pass-through of bank funding costs to lending and deposit rates: lessons from the financial crisis," Bank of England working papers 590, Bank of England.
    10. Cadamagnani, Fabrizio & Harimohan, Rashmi & Tangri, Kumar, 2015. "A bank within a bank: how a commercial bank’s treasury function affects the interest rates set for loans and deposits," Bank of England Quarterly Bulletin, Bank of England, vol. 55(2), pages 153-164.
    11. Paul Tucker & Simon Hall & Aashish Pattani, 2013. "Macroprudential policy at the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 192-200.
    12. Boukhatem, Jamel & Djelassi, Mouldi, 2020. "Liquidity risk in the Saudi banking system: Is there any Islamic banking specificity?," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 206-219.
    13. Moe Thorvald Grung, 2018. "Financial Stability and Money Creation: A Review of Morgan Ricks: The Money Problem," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 8(2), pages 1-16, July.
    14. Clemens Bonner & Iman Lelyveld & Robert Zymek, 2015. "Banks’ Liquidity Buffers and the Role of Liquidity Regulation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(3), pages 215-234, December.
    15. Robert Hills & Glenn Hoggarth, 2013. "Cross-border bank credit and global financial stability," Bank of England Quarterly Bulletin, Bank of England, vol. 53(2), pages 126-136.
    16. van Eeghen, Piet-Hein, 2021. "Funding money-creating banks: Cash funding, balance sheet funding and the moral hazard of currency elasticity," International Review of Financial Analysis, Elsevier, vol. 76(C).
    17. Nicholas Butt & Silvia Domit & Michael McLeay & Ryland Thomas & Lewis Kirkham, 2012. "What can the money data tell us about the impact of QE?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 321-331.
    18. Daniel Quigley & Ansgar Walther, 2024. "Inside and Outside Information," Journal of Finance, American Finance Association, vol. 79(4), pages 2667-2714, August.
    19. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2021. "Discovering the True Schumpeter - New Insights into the Finance and Growth Nexus," CEPR Discussion Papers 16851, C.E.P.R. Discussion Papers.
    20. Donaldson, Jason & Piacentino, Giorgia, 2019. "Money Runs," CEPR Discussion Papers 13955, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:qbullt:0156. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Publications Group (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.