Cover IMF Working Papers
Buy Book in Print
Bank Solvency and Funding Cost: New Data and New Results
Author:
Mr. Stefan W. Schmitz null

Search for other papers by Mr. Stefan W. Schmitz in
Current site
Google Scholar Close
,
Michael Sigmund null

Search for other papers by Michael Sigmund in
Current site
Google Scholar Close
, and
Ms. Laura Valderrama
Search for other papers by Ms. Laura Valderrama in
Current site
Google Scholar Close
https://orcid.org/0000-0001-5968-6092
Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 116
Language:
English
Publication Date:
15 May 2017
DOI:
https://doi.org/10.5089/9781484300664.001
ISBN:
9781484300664
ISSN:
1018-5941
Pages:
46
Keywords:
WP; funding cost; solvency risk; net income; nexus slashes bank; Solvency; stress testing; bank rating; asset volatility; regulatory capital; liquidity risk bearing capacity; solvency equation; feedback effect; Bank solvency; Capital adequacy requirements; Credit default swap; Global; North America
Legal-disclaimer:
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.
Download PDF (1.6 MB) Download Epub
This paper presents new evidence on the empirical relationship between bank solvency and funding costs. Building on a newly constructed dataset drawing on supervisory data for 54 large banks from six advanced countries over 2004–2013, we use a simultaneous equation approach to estimate the contemporaneous interaction between solvency and liquidity. Our results show that liquidity and solvency interactions can be more material than suggested by the existing empirical literature. A 100 bps increase in regulatory capital ratios is associated with a decrease of bank funding costs of about 105 bps. A 100 bps increase in funding costs reduces regulatory capital buffers by 32 bps. We also find evidence of non-linear effects between solvency and funding costs. Understanding the impact of solvency on funding costs is particularly relevant for stress testing. Our analysis suggests that neglecting the dynamic features of the solvency-liquidity nexus in the 2014 EU-wide stress test could have led to a significant underestimation of the impact of stress on bank capital ratios.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund