THE CALL · THE LOAN · PRICE
A borrower wants a five-year fixed rate. The bank funds itself at floating rates.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Bank Bill Rate (BKBM and BBSY): a Worked Example
The base resets every rollover; the margin stays where it was agreed.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
The bank bill rate is the half of a floating business loan's interest rate that the bank does not choose. In New Zealand it is BKBM and in Australia BBSY, each read from the market for short-term bank paper every business morning. A borrower picks an interest period, often 90 days, and pays the rate for that term fixed at the start of the period, plus its own credit margin. When the period ends the loan rolls to the new rate. For the lender it passes the market price of short-term money straight through; for the borrower it is the part a swap can fix.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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// 01 — WHAT THE RATE MEASURES
Bank bills are short-term securities, from one to six months, issued or accepted by banks and traded between banks, fund managers and companies. The yield at which they trade is the price at which the banking system raises short-term money. Pricing a loan over that yield lets the bank pass its marginal cost of short money to the borrower and keep the margin for the risk. Because the rate for a term is known on the first day of the period, the borrower knows its interest bill for the next 90 days before the period starts.
The rate is not the central bank's cash rate. The official cash rate in New Zealand and the cash rate in Australia are overnight policy rates. A 90-day bill rate reflects where the market expects the policy rate to be over the next three months, plus a small premium for lending to a bank for that term rather than overnight. When a rate cut is expected, the bill rate tends to fall before the cut is announced.
// 02 — HOW EACH RATE IS SET
In Australia, ASX Benchmarks administers BBSW, the bank bill swap rate. It is calculated each business day for one to six months, primarily from eligible trades in prime bank paper in a rate-set window from 8:30 to 10:00am Sydney time, with fall-back methods when trades are too few, and published by 10:30am. BBSY is derived from it: the BBSY bid rate sits five basis points above the BBSW mid-rate and the ask rate five below. Many floating business loans in Australia are priced on BBSY bid.
In New Zealand, BKBM, the bank bill benchmark rate, is administered by the New Zealand Financial Benchmark Facility, which holds a benchmark administrator's licence from the Financial Markets Authority. It is calculated from trades in bank bills, or from firm bids and offers when trades are thin, in a two-minute window each business morning. It is also the floating rate in New Zealand dollar interest rate swaps, which is why a loan priced on BKBM can be hedged closely.
Loan rate for the period = bill rate for the chosen term + credit margin
Interest for the period = balance × loan rate × days ÷ 365
Both markets count days on an actual-over-365 basis. Interest periods are chosen from a menu, commonly 30 to 180 days. Repaying in the middle of a period can trigger break costs, because the bank funded the period at the rate set on its first day.
// 03 — THE EXAMPLE
A grain storage and handling business in Australia, constructed for this page like every figure in it, has a US$15m term facility at BBSY bid plus a margin of 1.90%, rolled every 90 days. At the first rollover the 90-day BBSW mid-rate is 3.70%.
Rollover 1: BBSW mid 3.70% → BBSY bid 3.75%
3.75 + 1.90 = 5.65%
15,000,000 × 5.65% × 90 ÷ 365 = US$208,973
Rollover 2: BBSY bid 3.45%
3.45 + 1.90 = 5.35%
15,000,000 × 5.35% × 90 ÷ 365 = US$197,877
Change in one quarter's interest = US$11,096
The bank did nothing between the two rollovers. The market moved, and the loan followed it on the reset date and not before. The margin of 1.90% is unchanged and stays so until the facility is renegotiated or a pricing grid moves it. The figures are the example's, not a market level.
The five basis points between BBSY bid and BBSW matter when offers are compared. A second lender quoting BBSW plus 1.90% is cheaper by five basis points, which on this facility is US$7,500 a year, for what looks like the same margin.
// 04 — WHAT CHANGES IN THE UK
UK loans no longer have a term bank rate of this kind. Sterling LIBOR stopped for good with its last synthetic setting in March 2024, and the market moved to SONIA, the overnight rate the Bank of England administers. The Bank-convened working group's prevailing view was that overnight SONIA compounded in arrears should become the norm for bilateral and syndicated loans, and it expected that rate to suit about 90% of legacy loans by value. For loans priced this way the interest for a period is known only at its end, a few days before payment. Smaller loans more often use Bank Rate, a fixed rate or, in limited cases, a forward-looking term SONIA.
Smaller loans and overdrafts in New Zealand and Australia often sit off the benchmark too, but differently: many are priced over a bank's own base or reference rate, which the bank sets and changes by notice, rather than over BKBM or BBSY.
DEFINED IN ONE PARAGRAPH → · HOW AN INTEREST RATE CHANGE REACHES YOU → · FIXED VS FLOATING RATE →
// 05 — WHERE IT DECIDES A FILE
A credit officer reads the bill rate in two places. The first is interest cover: the borrower's ability to pay is tested at the current rate and at a higher one, because the floating part is outside both parties' control. The second is the hedge. A swap that fixes BKBM or BBSW for part of the debt works cleanly only if its reset dates and terms match the loan's rollovers; a 90-day loan hedged with a swap resetting on different dates leaves a small gap each quarter. The facility's interest rate floor, and its fallback clause for a benchmark that stops being published, sit in the same part of the document and are read together.
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- ASX Benchmarks, BBSW Conventions and Methodology — section 2.3 (paragraphs 16–18) and paragraphs 8 and 25 — Sets the rate-set window of 8:30–10:00am, publication by 10:30am for one- to six-month tenors, and BBSY bid and ask at five basis points either side of the BBSW mid-rate, used to price floating-rate loans — sections 02 and 03.
- Financial Markets Authority, EU allows continued use of New Zealand regulated financial benchmarks, 3 December 2025 — Confirms the New Zealand Financial Benchmark Facility as the licensed administrator of BKBM and its use as a base rate in contracts such as interest rate swaps — section 02.
- The Working Group on Sterling Risk-Free Reference Rates, Best Practice Guide for GBP Loans, February 2021 (updated July 2021) — foreword and section 2.2 — States the prevailing view that SONIA compounded in arrears should become the norm in loan markets, about 90% of legacy loans by value, with Bank Rate, fixed rates and term SONIA for smaller borrowers — section 04.
// QUESTIONS PEOPLE ASK
- What is the difference between BBSW and BBSY?
- BBSW is the Australian benchmark mid-rate for bank bills of one to six months, calculated each morning by ASX. BBSY is not a separate benchmark but a pair of rates derived from it: the bid rate is five basis points above BBSW and the ask rate five below. Many Australian business loans are priced over BBSY bid, so the borrower pays five basis points more than the same margin over BBSW.
- What does BKBM stand for, and who sets it?
- BKBM is the bank bill benchmark rate, New Zealand's main floating benchmark for loans, bonds and swaps. It is administered by the New Zealand Financial Benchmark Facility, which is licensed by the Financial Markets Authority, and is calculated each business morning from trading in bank bills, or from firm bids and offers, during a short window. Rates are published for terms of one to six months.
- How often does a bank bill business loan reset?
- At the end of each interest period the borrower has chosen, commonly 30, 60, 90 or 180 days. The rate for the new period is the bill rate for that term on the first day, plus the margin, and it holds until the period ends. Shorter periods follow the market more closely; longer ones delay both rises and falls.
- Is the bank bill rate the same as the official cash rate?
- No. The cash rate in Australia and the official cash rate in New Zealand are overnight policy rates set by the central banks. Bank bill rates are market rates for one to six months, so they reflect where the market expects the policy rate to go over the term, plus a small premium. They usually move before a policy decision, when the market starts to expect it.
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