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

Daniel Fabbro and Mark Hack
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Daniel Fabbro: Reserve Bank of Australia
Mark Hack: Reserve Bank of Australia

RBA Bulletin (Print copy discontinued), 2011, 35-42

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.

Keywords: funding costs; lending rates; interest rates; risk pricing (search for similar items in EconPapers)
Date: 2011
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