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Bank Solvency and Funding Cost
Author:
Christoph Aymannsnull

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Carlos Caceres
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Christina Daniel
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Miss Liliana B Schumacher
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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 064
Language:
English
Publication Date:
15 Mar 2016
DOI:
https://doi.org/10.5089/9781513591131.001
ISBN:
9781513591131
ISSN:
1018-5941
Pages:
30
Keywords:
WP; funding cost; bank fundamentals; default probability; federal funds; return on assets; solvency shock; Solvency; stress testing; solvency measure; FDIC bank default dataset; Bank solvency; Estimation techniques; Capital adequacy requirements; Financial statements; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2016: Issue 064