The Bank would like to avoid discontinuation of the indices on short notice, which could occur if there were a further drop in the number of financial institutions eligible to provide
cost of funds data.
If the rewards-based checking product is structured correctly, the
cost of funds discount stays fairly stable as a percentage, meaning the total savings versus the alternative funding source dramatically increases as rates rise.
Banks use marginal
cost of funds when there is sufficient liquidity available at that rate to fund a reasonable proportion of the asset portfolio.Aditya PuriMD and CEO, HDFC Bank
The group has also suggested that banks move towards a new system of computing the base rate on the basis of marginal
cost of funds instead of the present system of using the weighted average
cost of funds.
This is significant as it means that further lending will need to be financed through costlier deposits and hence increase
cost of funds. This supports our view that net interest margins will continue to be under pressure in the short-term.
He added he could not rule out further reductions in home loans but it would depend on deposit rates and the
cost of funds.
While other variables, such as the cost of equity, profit margins and the risks associated with lending will also have a bearing on the interest rates customers are charged, the
cost of funds will be major factor.
He said: "Over the last year the
cost of funds at which we need to borrow at to fund our mortgage commitments has risen considerably.
To examine and compare various elements of
cost of funds and return on funds of various categories of banks.
Trichet said the ECB would index the
cost of funds at its next - and final - 12-month liquidity operation on December 16 to its main policy rate, linking it to the average minimum
cost of funds in its regular weekly loans to banks.