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Bank funding – the change in composition and pricing

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Abstract

Historically the Official Cash Rate (OCR) has been a good proxy for the cost of funding for banks. However, the global financial crisis of 2007-2009 and regulatory changes have had a significant impact on this relationship. The move towards banks seeking more stable sources of funding like retail deposits and long-term wholesale debt has changed the composition of funding. The price of these more stable sources of funding has also increased, driven by competition for funds and deterioration in funding market conditions. Thus, the cost of funding for banks has increased significantly relative to the OCR. We illustrate this by calculating a notional marginal funding cost indicator. These higher funding costs have been directly passed on to higher mortgage rates.

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  • 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.
    • Handle: RePEc:nzb:nzbbul:jun2012:2
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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2012/2012jun75-2wong.pdf
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    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. Daan Steenkamp & Tim Olds, 2021. "Estimates of bank-level funding costs in South Africa," Working Papers 857, Economic Research Southern Africa.
    3. 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.

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