National Australia Bank chief executive Cameron Clyne said yesterday that he welcomed the opportunity to talk about how the bank set its interest rates.Clyne said it was time everyone acknowledged that the Reserve Bank's official cash rate was not the driver of interest rate movement, that the cash rate was only a small part of how the bank's cost of funds is determined.He said the bank set rates that reflected its cost of funds and also the risk involved in providing finance to different classes of borrowers.NAB outlined the overall approach in the introduction to its financial report. "System loan pricing that allows for a fuller acknowledgement of these risks," the bank wrote, "seems likely to persist, with no reversion to the unduly thin margins seen before the onset of the financial crisis."But a reading of the bank's financial report for the six months to March does not reveal much logic in its pricing strategy.In New Zealand the ratio of gross impaired assets to gross loans and acceptances jumped from 0.1 per cent in March 2008 to 0.75 per cent in the latest half. But over that period the bank increased its lending margin by a modest 12 basis points.For a market that had suffered the biggest blowout in its impaired asset ratio, one might have expected a more significant re-pricing.In the Australian banking market, where the ratio of gross impaired assets to gross loans and acceptances increased from 0.37 per cent in March last year to 0.56 per cent in the latest half, the lending margin went up 27 basis points.In a market where assets performed better, borrowers were asked to pay more. Is that pricing for risk or abuse of market power?In the UK market, where the impaired asset ratio rose from 0.27 to 1.11 per cent over the year, the lending margin went up 47 basis points.