Why Central Banks Are Watching Bank Funding Costs

Lucas and Luna explore why central banks are increasingly focused on bank funding costs as a leading indicator of financial stability and monetary policy transmission. Using the 2023 regional banking turmoil as a reference point, they examine how the spread between bank deposit rates and risk-free rates has narrowed, squeezing net interest margins and signaling potential credit tightening. The hosts discuss how the Federal Reserve now monitors the Bank Funding Cost Index from the Office of Financial Research, and how the European Central Bank tracks the pass-through of rate hikes to bank lending rates via the Bank Lending Survey. They also touch on the Bank of England's focus on the Sterling Overnight Index Average (SONIA) as a benchmark for funding costs. The episode concludes by considering whether central banks should incorporate funding stress indicators into their policy reaction functions. This episode is perfect for economics enthusiasts who want to understand the plumbing between central bank policy and bank behavior. #CentralBanks #MonetaryPolicy #BankFundingCosts #FinancialStability #NetInterestMargin #FederalReserve #EuropeanCentralBank #BankOfEngland #OfficeOfFinancialResearch #SONIA #BankLendingSurvey #RegionalBankingCrisis #PolicyTransmission #FundingStressIndicator #InterestRateRisk #Economics #FexingoBusiness #BusinessPodcast Keep every episode free: buymeacoffee.com/fexingo