Cost of funds
What is a bank's cost of funds?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A bank's cost of funds is the blended price of the money it lends — deposits, wholesale borrowing, the bonds it issues — and the floor under every lending rate it quotes. It is why loan pricing moves when funding markets move, even for borrowers whose risk has not changed, and why a bank with cheaper deposits can price more sharply for the same risk. The difference between what a bank earns on its loans and its cost of funds is its net interest margin.
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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