AND TODAY ANOTHER new idea from the Hong Kong Monetary Authority, this time the one proposed by chief executive Joseph Yam Chi-kwong that banks base their mortgage rates on a new cost of funds he has devised rather than on the best lending rate. There is immediate reason for it in that the best lending rate is no such thing at all. When 98 per cent of all new mortgages carry lower interest rates it is actually more of a worst lending rate. There is also the fact that the days are past of a best lending rate fixed by HSBC with all the other banks falling rigidly in line. The rate may still not vary much but things can be a little confusing when a discount from one best lending rate is not the same as a discount from another. Thus why not clean things up by having the entire banking sector establish a single average cost of funds. Each individual bank can then say at what premium to this cost of funds it will issue mortgages. It would make it easier for homebuyers to shop between banks and end the anomaly of a worst rate going by the name of a best rate. Mr Yam has yet to publish his cost of funds index but I can work out a rough one of my own. Take the proportion of total Hong Kong dollar bank deposits held in each of demand deposits, savings deposits and term deposits and then take each of these times their most representative interest rate (none for demand deposits and three-month rate for term deposits). Mr Yam reportedly has been fancier about this by including factors for interbank rates and other things but mine will do and it has the advantage of allowing figures to be plotted all the way back to 1980. It is represented in the first chart by the blue line. One thing immediately stands out about this chart. The HSBC best lending rate, the red line, marches in almost lock step with the average cost of deposits. What the banks have done is fix a target premium of 500 basis points higher for their best lending rate. It is not an absolutely constant premium. It was higher pre-1985 and it dipped much lower in the financial crisis in 1997 and 1998 but it clearly dances to the same tune, which raises the question of why pick another benchmark when it is not much different. Don't ask me why 500 basis points. That is just the way things are. It is also possible from figures published by the HKMA to calculate a rough average new mortgage rate for as far back as 1997. The second chart shows the historical record of how much higher it has been than my average cost of deposits rate. It was much higher until 2000 and then trickled steadily down and is still doing so as of the most recent figure available. The margins on mortgage lending, at least for those banks that rely for funds on their own deposits rather than the interbank market, are pinched but it is still a money-making business. But does it really make more sense to base mortgage rates on a cost of funds index rather than on the best lending rate? Most bankers are not particularly enthusiastic about the idea. They point out that their customers seem satisfied with the present system and fall back on the old adage that, if it ain't bust, don't fix it. Of course, they have their own interests at heart here. A market that consumers find simpler to understand is not necessarily better for bankers. They would prefer that consumers not shop for the best rates. It would probably mean lower margins for them. But it is by no means apparent to me that an index calculated by the HKMA in a way that very few bank customers have the tools to duplicate is necessarily simpler. I also doubt that it would make much difference to mortgage rates. The market has a way of ignoring such devices. In the end, it is a cute idea but not one that will improve the efficiency of our financial markets by much. If the banks do not want to adopt this idea, then it is probably not worth pushing. There are more pressing matters to which HKMA can devote its efforts.