Bank Solvency and Funding Cost

By Christoph Aymanns, Carlos Caceres, Christina Daniel, Liliana B Schumacher

March 15, 2016

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Christoph Aymanns, Carlos Caceres, Christina Daniel, and Liliana B Schumacher. Bank Solvency and Funding Cost, (USA: International Monetary Fund, 2016) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Understanding the interaction between bank solvency and funding cost is a crucial pre-requisite for stress-testing. In this paper we study the sensitivity of bank funding cost to solvency measures while controlling for various other measures of bank fundamentals. The analysis includes two measures of bank funding cost: (a) average funding cost and (b) interbank funding cost as a proxy of wholesale funding cost. The main findings are: (1) Solvency is negatively and significantly related to measures of funding cost, but the effect is small in magnitude. (2) On average, the relationship is stronger for interbank funding cost than for average funding cost. (3) During periods of stress interbank funding cost is more sensitive to solvency than in normal times. Finally, (4) the relationship between funding cost and solvency appears to be non-linear, with higher sensitivity of funding cost at lower levels of solvency.

Subject: Bank solvency, Banking, Capital adequacy requirements, Econometric analysis, Estimation techniques, Financial regulation and supervision, Financial sector policy and analysis, Financial statements, Public financial management (PFM), Solvency

Keywords: Bank fundamentals, Bank solvency, Capital adequacy requirements, Default probability, Estimation techniques, FDIC bank default dataset, Federal funds, Financial statements, Funding cost, Global, Return on assets, Solvency, Solvency measure, Solvency shock, Stress testing, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/064
Stock No:

WPIEA2016064
ISBN:

9781513591131
ISSN:

1018-5941

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