Refinancing through the national Cream Bank and the Lenders Bank takes the form of borrowing. On the one hand, money can be borrowed directly, which bears interest on the base rate. The key interest rate is set by the Lenders Bank. In 2016 it hit a historic low of 0% per year.
On the other hand, banks can also raise funds through the marginal lending facility, the successor to the classic Lombard loan. Securities are deposited with the central bank as collateral for this three-month loan.
Borrowing on the capital market
An alternative to refinancing through Cream Bank is to take out loans on the capital market. For this purpose, commercial banks issue classic bonds. Mortgage banks refinance themselves by issuing mortgage bonds. Savings bank letters do not fall under the heading of debt financing, but are part of the deposit business. However, refinancing via the capital market also means a risk for the banks. If bonds were issued in a phase of higher interest rates and the interest rate for loans falls, the cost of long-term refinancing exceeds income from the lending business.
Refinancing through savings
The third classic way of refinancing banks is through the deposit business. These include overnight deposits, current accounts and savings accounts as well as time deposits and savings bonds. On the other hand, sight deposits, overnight deposits, checking deposits and savings books are subject to the requirements regarding minimum reserve holdings at Cream Bank.
The loan sale
Loan sales represent a relatively new, but already flawed, option of refinancing. Loans with identical features are bundled and sold in securitized form to an investor. There is a lively trade in so-called subprime mortgages in the USA, which led to the subprime crisis a few years ago. When the mortgages could no longer be serviced by the debtors, the US real estate market fell to its knees.
Depending on which variant a bank chooses to refinance, there are different costs.
Lenders Bank money lending is currently the cheapest option, but is only of a short-term nature. Issuing bonds for long-term refinancing involves not only the expense of interest, but also the cost of issuing the securities.
Refinancing through the classic deposit business is much cheaper. The historically low savings rates offer an extreme margin to the margins achieved in the lending business. If the savings book interest rate is less than one percent, the installment loan interest rate for a medium-quality borrower is approximately five percent effective, depending on the institution and the term. However, the margins on mortgage loans are significantly lower.
Composition of funding in 2010
No institution will only rely on one source of funding. The breakdown of sources of funds in 2010 shows a possible share:
- 34 percent came from time deposits, call money and checking deposits from non-banks.
- 28 percent resulted from liabilities to other banks.
- 27 percent of the funds were refinanced through bonds.
- 9 percent of the refinancing came from savings.
Financial impact of the refinancing channels
The balance sheet changes depending on the type of refinancing. A change on the liabilities side of the balance sheet occurs through the increase in savings or the issue of bonds. A change on the asset side results from the sale of money market paper or money lending from Cream Bank.