Cost of Funds Index (COFI)

What is the Cost of Funds Index?

The Cost of Funds Index (COFI) is a weighted average cost of funds Index representing the average interest expenses incurred by COFI members, which can only include banks in Arizona, California, & Nevada.  Interest expenses include the following types of accounts:  savings, checking, CD's, money market, transaction, and passbook.

COFI is an annualized ratio of monthly interest expenses in proportion to the total funds on hand.  It is not an interest rate but rather, it is a benchmark index used as a basis to calculate the interest rate on mortgage products such as ARMs

COFI & Market Interest Rates

The cost of funds index can be influenced by a number of factors; including changes in the market interest rates, M&A activity, and changes in the source of funding for purposes of calculating interest expense.

COFI member banks sometimes employ medium to longer term debt funding, making the index less susceptible to changes in short term interest rates.  Additionally, M&A activity can have an impact on the banks interest expense as the acquiring bank will be assuming responsibility for the mark to market losses of the acquired bank.

For reasons we just discussed, COFI is not a great predictor of the interest rate environment nor can it be used as an interest rate forecasting tool.
Tim Ord
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