The Banks’ Cost of Funds

We hear and read about it all the time:  the banks’ cost of funds justifies whatever move they make in their published or quoted interest rates.  We also hear and read speculation about their true cost of funds.  Having watched this closely for quite a while, I can report that most of their costs are in what they pay their local customers for deposits, such as savings accounts and term deposits.  A much smaller, but highly publicized, source of funds is international markets.

The third source is what they pay each other to borrow funds, the most common measure of which is Bank Bill Swap Rates, which have fixed terms of 30 days to 5 years.  The latter is the typical term for Medical Equipment Finance.  So, what range of rates should we expect, assuming a 5-year facility for equipment finance?

I have it on good authority (a banker) that the majors’ cost of funds averages 70-100 basis points (0.7-1.0%) over the swap rate on any given day.  Second tier lenders are still disadvantaged by our financial system to the tune of an additional 40-50 points.  The 5-year swap rate last Friday was 3.54%, so if we add 100 points, the majors’ cost of funds was about 4.54%.  They’ll typically seek a margin of 200 points, so I would expect them to quote a rate to their existing clients somewhere around 6.5%.  The second tier lenders will be around 7%, but both rates will be higher for new clients or those with questionable risk profiles.

Don’t Fight the Loan Approval Process

It’s not enough to be able to easily repay a loan.  It’s not enough to pay on time.  It’s not enough to have a high net worth.  And, it’s not enough to have a position of respect within the community.  For a smooth approval process, it’s all about your transparency and ability to document any and all aspects of your finances.  That’s the only way to satisfy the lenders’ need to create a ‘Perfect Loan File’, according to Mark Greene in a recent article in Forbes.  The meltdown in the real estate market in the U.S. was/is, of course, much worse than here, but the attitude of the banks is the same.  If they can’t tick every box on their credit matrix on the first pass, the approval of our application will be slow at best.

So, the way forward is to accept the often redundant documentation requests, remembering that when we were kids, one of our parents’ favourite replies to “Why?” was “Because I said so.”

So, what’s the perfect loan?  Well, it’s one that (a) pays back the lender and (b) pays back the lender on time.  But, underwriting the perfect loan is not the goal that lenders aspire to today.

The real goal is the Perfect Loan File.