Listen to a Business English Dialogue About Cost of funds
Scarlett: Hi Amelia, do you know what “cost of funds” means in finance?
Amelia: Yes, I think it refers to the interest rate or cost that a financial institution incurs when obtaining funds, such as through deposits or borrowing.
Scarlett: That’s correct. It’s the expense associated with acquiring the money that a bank or other financial institution lends out to borrowers.
Amelia: How do financial institutions determine their cost of funds?
Scarlett: They consider factors like the interest rates they pay on deposits, the rates they pay to borrow from other institutions or the central bank, and any other expenses related to obtaining funds.
Amelia: Does the cost of funds affect the interest rates that banks charge on loans?
Scarlett: Absolutely. Banks typically aim to lend at rates higher than their cost of funds to generate profit.
Amelia: So, if the cost of funds increases, banks might raise their loan rates?
Scarlett: Yes, that’s one possibility. When the cost of funds rises, banks might adjust their lending rates to maintain their profit margins.
Amelia: How does the cost of funds impact consumers and businesses?
Scarlett: Higher cost of funds can lead to higher interest rates on loans and credit products, making borrowing more expensive for consumers and businesses.
Amelia: Thanks for explaining, Scarlett. The cost of funds seems like an important factor in banking and finance.
Scarlett: No problem, Amelia. It’s a key consideration for both financial institutions and their customers.