Bank Solvency and Funding Cost

31 Pages Posted: 26 Apr 2016

See all articles by Christoph Aymanns

Christoph Aymanns

London School of Economics & Political Science (LSE) - London School of Economics; University of St. Gallen - School of Finance

Carlos Caceres

International Monetary Fund (IMF)

Christina Daniel

International Monetary Fund (IMF)

Liliana B. Schumacher

International Monetary Fund (IMF) - Asia and Pacific Department; George Washington University - Department of International Business

Date Written: March 2016

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.

Keywords: Solvency, funding cost, bank fundamentals, bank, banks, interest, capital, risk, General, All Countries,

JEL Classification: C50, G00, G10, G21

Suggested Citation

Aymanns, Christoph and Caceres, Carlos and Daniel, Christina and Schumacher, Liliana, Bank Solvency and Funding Cost (March 2016). IMF Working Paper No. 16/64, Available at SSRN: https://ssrn.com/abstract=2770297

Christoph Aymanns (Contact Author)

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

University of St. Gallen - School of Finance

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Carlos Caceres

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Christina Daniel

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Liliana Schumacher

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

George Washington University - Department of International Business ( email )

2023 G Street NW
Washington, DC 20052
United States
202-244-3971 (Phone)
202-244-3971 (Fax)

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