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Bank Solvency and Funding Cost

Author

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  • Christoph Aymanns
  • Carlos Caceres
  • Christina Daniel
  • Liliana B Schumacher

Abstract

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.

Suggested Citation

  • Christoph Aymanns & Carlos Caceres & Christina Daniel & Liliana B Schumacher, 2016. "Bank Solvency and Funding Cost," IMF Working Papers 16/64, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:16/64
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    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410, Central Bank of Chile.
    4. Rita Babihuga & Marco Spaltro, 2014. "Bank Funding Costs for International Banks," IMF Working Papers 14/71, International Monetary Fund.
    5. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    6. Maechler, Andrea M. & McDill, Kathleen M., 2006. "Dynamic depositor discipline in US banks," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1871-1898, July.
    7. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
    8. Vasso P. Ioannidou & Jan De Dreu, 2005. "The impact of explicit deposit insurance on market discipline," Proceedings 992, Federal Reserve Bank of Chicago.
    9. Caccioli, Fabio & Shrestha, Munik & Moore, Cristopher & Farmer, J. Doyne, 2014. "Stability analysis of financial contagion due to overlapping portfolios," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 233-245.
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    Cited by:

    1. repec:eee:phsmap:v:503:y:2018:i:c:p:1151-1181 is not listed on IDEAS
    2. repec:pal:jbkreg:v:20:y:2019:i:2:d:10.1057_s41261-018-0080-5 is not listed on IDEAS

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    Keywords

    Stress testing; Solvency; funding cost; bank fundamentals; bank; banks; interest; capital; risk; General; All Countries;

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