While the official cash rate has fallen by 50 basis points since mid-2011, the major banks' average cost of deposits is estimated to have declined by only about 25 basis points, the Reserve Bank said yesterday.The cost of the banks' outstanding long-term wholesale debt is likely to have risen by about 25 basis points relative to the cash rate over the last year.Over the past year, lending rates and funding costs have both risen relative to the cash rate, but lending rates have generally risen by less.The RBA has devoted a whole article in its latest bulletin to analysing banks' funding costs. It found that "there were particularly pronounced increases in the cost of term deposits and long-term debt relative to the cash rate as financial market conditions deteriorated in late 2011."The increase in the relative cost of term deposits and wholesale debt has led to an increase in the weighted average cost of funds for banks relative to the cash rate."However, while the RBA analysis supports the banks' argument that higher funding costs have forced their hands on rate increases it also implies they might be crying wolf.It says: "Recent movements in margins reported by the major banks… are relatively small compared with the decline in margins experienced over the preceding decade."Since the onset of the financial crisis, banks have increased the spread between lending rates and the cash rate for all loan types."Taking the cost of individual funding sources and weighting them by their share of total bank funding compared with mid-2007, the RBA estimates that the average cost of the major banks' funding is now 120 to 125 basis points higher relative to the cash rate. Most of the increase occurred during 2008 and 2009. Since the middle of 2011 there has been a further increase in banks' costs relative to the cash rate in the order of 20 to 25 basis points.Interestingly, the RBA says the big cost increase has come from deposits, not wholesale funding. It said: "Within banks' deposit funding there has been a marked shift towards term deposits, which pay higher interest rates than other forms of deposits. Term deposits have accounted for most of the growth in bank deposits since the onset of the financial crisis."Term deposits account for 45 per cent of bank deposits - up from 30 per cent in mid 2007. "While the relative cost of new long-term wholesale funds is currently higher than that of maturing funds, this has had only a moderate effect on the major banks' average bond funding costs relative to the cash rate to date. This reflects the fact that it takes three to four years for the major banks' existing bond funding to be rolled over."Since spreads began to rise sharply in August 2011, the major banks' issuance of new bonds amounts to about 12 per cent of their outstanding bonds."The RBA also found that the overall increase in regional banks' funding costs since the onset of the financial crisis has been larger