The Banks’ Costs of Funds

The banks continue to use their increased cost of funds as an excuse for raising residential housing rates out of step with the RBA cash rate.  Rates for fixed-term asset finance, such as that for Medical Equipment, move all the time as each bank continually adjusts for balance, costs, and risk.  How to define their cost of funds remains a hot question.  It’s easy to see what they’re paying for term deposits, the highest of which are currently 6.67% for three years and 7.34% for five years.  But, what about the elusive international wholesale costs?

It appears that Westpac recently raised US$3 billion with the sale of bonds in the U.S.  The three-year rate is 125 points over bank bills, and the five-year rate is 160 points over banks bills.  Ninety-day bills are currently about 4.7%, so their cost is 5.95% for 3-year terms and 6.3% for 5-year terms.  The interest rates currently applicable to Medical Equipment Finance are in the mid-8s for 5-year terms, so it all adds up to about a 2% margin over their cost of the U.S. bonds.

There are, of course, many other factors that affect their average cost of funds, but this at least clears up one aspect.

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