Reassuringly expensive

A number of lessons have been learned in the wake of the credit crisis, not least of all the importance of liquidity and counterparty credit risks. Following the drying up of liquidity, funding has become a key component of derivatives pricing. How has that affected business and has it changed the competitive environment? By Duncan Wood

Prior to the credit crunch, bank business lines behaved as though, somewhere in the bowels of their institution, there was a magical money machine: it didn't matter how many loans or trades the bank made, the machine would churn out as much money as required. In a way, the businesses were right - at the time, short-term funds were practically free of charge and even longer-term funding was cheap. Now, things couldn't be more different. Funding has become expensive and scarce.

As a consequence