The Rates Banks Charge Vs. Their Funding Cost

In an article in the Washington Post today, Steven Pearlstein wrote that "the Fed was [..] lowering the interest rate at which banks borrow from the Fed and each other, to pretty close to zero. What didn't change was the interest rate banks charged everyone else. As a result, "spreads" between what banks pay for money and what they charge are near record highs."

We can relatively easily find hard data to back up that claim. For example, we can look at the average 24-month finance rate for a personal loan by a commercial bank. If you want to try this at home, I'm using the CCOI24MO Index on Bloomberg. (FYI, the Bloomberg description adds that "the index is taken from the G.19 report disseminated by the Federal Reserve, and is not seasonally adjusted.") The value of that index dropped to a rate of 11.25%, much lower than in recent past. But to echo Pearlstein's point, we want to compare it to the cost of funding that banks themselves face, i.e., to LIBOR. The graph of the spread makes the point clear:



The spread hasn't been that high since the early 2000's and the early 1990's.