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The golden rule of banking: funding cost risks of bank business models

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Listed:
  • David Grossmann

    () (Andrássy University Budapest
    Claussen-Simon Graduate Centre at HSBA)

  • Peter Scholz

    (HSBA Hamburg School of Business Administration)

Abstract

The liquidity regulation of banks in Pillar 1 of the Basel framework does not consider longer-term funding cost risks of different bank business models. Therefore, we assemble a data set of balance sheet positions including maturities and use the method of Value-Liquidity-at-Risk to explore 118 European retail, wholesale, and trading banks. When examining liquidity-induced equity risks, trigged by exemplary rating shifts, we find that retail banks bear significantly lower funding cost risks than wholesale and trading banks. Consequently, a prudential regulation, which simultaneously considers the funding cost risk and the diversification of the banking system, is recommended.

Suggested Citation

  • David Grossmann & Peter Scholz, 2019. "The golden rule of banking: funding cost risks of bank business models," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(2), pages 174-196, June.
  • Handle: RePEc:pal:jbkreg:v:20:y:2019:i:2:d:10.1057_s41261-018-0080-5
    DOI: 10.1057/s41261-018-0080-5
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    More about this item

    Keywords

    Bank business models; Funding cost risk; Liquidity requirements; Value-Liquidity-at-Risk; Value Liquidity Expected Shortfall;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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