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Bank Funding Costs for International Banks

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  • Rita Babihuga
  • Marco Spaltro

Abstract

This paper investigates the determinants of bank funding costs for a sample of internationally active banks from 2001–12. We find that changes in banks’ unsecured funding costs are associated with bank-specific characteristics such as an institution’s credit worthiness and the return on its market value, and importantly, on the level and quality of capital. Similarly, market factors such as the level of investor risk appetite, as well as shocks to financial markets—notably the US subprime crisis and the Euro Area sovereign debt crisis—have also been key drivers of the sharp rise in bank funding costs. We also find evidence that large systemically important institutions have enjoyed a funding advantage, and that this advantage has risen since the onset of the two crises. With the exception of Euro Area periphery banks, by end-2012 the rise in funding costs had generally been reversed for most major banks as a result of improvments in bank asset quality as well as steps taken to increase resilience, notably higher capitalization. Our results suggest increased capital buffers may potentially support bank lending to the real economy by reducing bank funding costs.

Suggested Citation

  • Rita Babihuga & Marco Spaltro, 2014. "Bank Funding Costs for International Banks," IMF Working Papers 14/71, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:14/71
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    References listed on IDEAS

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    Cited by:

    1. S. Demiralp & J. Eisenschmidt & T. Vlassopoulos, 2017. "Negative interest rates, excess liquidity and bank business models: Banks’ reaction to unconventional monetary policy in the euro area," Koç University-TUSIAD Economic Research Forum Working Papers 1708, Koc University-TUSIAD Economic Research Forum.
    2. Kok, Christoffer & Gross, Marco & Żochowski, Dawid, 2016. "The impact of bank capital on economic activity - evidence from a mixed-cross-section GVAR model," Working Paper Series 1888, European Central Bank.
    3. International Monetary Fund, 2016. "United Kingdom; Financial Sector Assessment Program-Stress Testing the Banking Sector-Technical Note," IMF Staff Country Reports 16/163, International Monetary Fund.
    4. repec:eee:riibaf:v:42:y:2017:i:c:p:887-899 is not listed on IDEAS
    5. repec:eee:phsmap:v:503:y:2018:i:c:p:1151-1181 is not listed on IDEAS
    6. Christoph Aymanns & Carlos Caceres & Christina Daniel & Liliana B Schumacher, 2016. "Bank Solvency and Funding Cost," IMF Working Papers 16/64, International Monetary Fund.
    7. Demiralp, Selva & Eisenschmidt, Jens & Vlassopoulos, Thomas, 2019. "Negative interest rates, excess liquidity and retail deposits: banks’ reaction to unconventional monetary policy in the euro area," Working Paper Series 2283, European Central Bank.
    8. Robert McKeown, 2017. "Costs, Size And Returns To Scale Among Canadian And U.s. Commercial Banks," Working Paper 1382, Economics Department, Queen's University.
    9. Markus Eller & Thomas Reininger, 2016. "The influence of sovereign bond yields on bank lending rates: the pass-through in Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 54-78.
    10. Bredl, Sebastian, 2018. "The role of non-performing loans for bank lending rates," Discussion Papers 52/2018, Deutsche Bundesbank.

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