DEFINITION of Pooled Cost Of Funds
The pooled cost of funds is one possible method for determining an institution's overall cost of funds. Overall cost of funds refers to the cost incurred by an institution to take deposits and make loans. Investors provide funds to the institution which are paid interest. The interest paid to investors whose deposited funds are loaned out is referred to as the cost of funds. The pooled cost of funds looks at the institution's assets and liabilities as a whole. It is determined by dividing the balance sheet into several different categories of specific interest-earning assets. These assets are then matched against corresponding interest-sensitive liabilities.
BREAKING DOWN Pooled Cost Of Funds
The pooled cost of funds often matches assets and liabilities with similar or identical time horizons. It also charges debits and credits to the assets and liabilities, depending on the income they are earning or costing. This formula is generally adjusted for the legal reserves that banks are required to keep as a percentage of their deposits.