Bank funding – the change in composition and pricing

Release date
01/06/2012
Reference
Vol. 75. No. 2. June 2012
Author
Jason Wong
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.