By Emily Beau of the Bank’s Banking Policy Division, John Hill of the Major Banks and Insurers Sectoral Division, Tanveer Hussain of the Markets Directorate and Dan Nixon of the Bank’s Media and Publications Division.
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.
Bank funding costs: what are they, what determines them and why do they matter?