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.

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