Bank funding costs: what are they, what determines them and why do they matter?

As with other types of company, a bank needs to finance its business activities -- most notably making loans to households and firms -- with some source of funding. Banks have a range of possible sources of funding available to them, including savers' retail deposits and investors' wholesale funding, as well as the bank's capital base. Focusing on the cost of funding, this article explains in simple terms how to think about banks' funding costs and why they are of central importance to both monetary and financial stability. It is aimed at those seeking an introduction to what can often be a complicated issue. Funding costs also matter for financial stability. A rise in funding costs reduces a bank's profitability if the bank chooses to absorb the higher costs by leaving its loan rates unchanged. Alternatively, banks may choose to pass on an increase in funding costs to borrowers by raising the rates charged on new lending.