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Cost of Wholesale Funding
April 4, 2022 | Wholesale Funding Update
In this week’s update, we dig into the cost of wholesale funding. Last time around, we took a look at the size of the wholesale funding market using the recently released FDIC Q4 2021 data. On average, wholesale funds have higher interest costs than retail deposits, but they have fewer overhead costs because they do not require as many branches and personnel.
Interest expenses rose across the board in Q4, reflecting rising expectations of future short-term interest rates. Deposits cost 0.13% in Q4, up 0.03% from Q3. Banks that relied mostly on core deposits paid 0.12%, while banks that relied mostly on brokered deposits paid 0.95%. Other borrowed funds, which include FHLB advances, cost 1.54% on average in Q4, up 0.40% from the previous quarter.
Despite paying more for funding, banks that purchased the majority of their funding from the wholesale market had fewer overhead costs. Banks that relied mostly on the wholesale market had an average efficiency ratio of 55%, while banks that relied mostly on core deposits had an average efficiency ratio of 65%. The efficiency ratio measures the proportion of net revenues that are absorbed by overhead; a lower value indicates greater efficiency.
Moving forward, we expect funding costs to continue to rise as monetary policy tightens. In the next update, we’ll discuss the impact of rising rates on the wholesale market.