We estimate that if banks had not adjusted their lending interest rates to reflect their higher cost of funds over the past couple of years, they would now be incurring losses (Graph 4). That would have threatened their ability to keep raising funds and, in turn, their capacity to lend.
In the event, early in the financial crisis, banks did not pass on all of the increase in their cost of funds, but recently increases in lending rates have run ahead of the cost of funds. Banks’ margins are now a little wider than at the start of the crisis, and therefore are adding to profits.