## _wp12299 ## Source details **Canonical URL:** [_wp12299](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12299.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12299.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12299.pdf.json) --- ### Introduction: purpose and scope - Objective: assess whether bank funding models are irrevocably or temporarily damaged by (i) highlighting the importance of funding; (ii) comparing funding models between Europe and other regions; (iii) discussing cyclical and structural shifts in European funding models; (iv) presenting main implications of dysfunctional funding models in Europe; and (v) concluding with a range of options that could be considered to strengthen funding models. - Scope exclusions: broader liability structure (including derivatives and off-balance sheet liabilities, deposits and capital) and structural business model changes (e.g., Liikanen, Vickers and Volcker proposals) are beyond the scope of this study. ### Bank funding and liquidity concepts and measurement - Definitions and mechanics: - Retail deposits: from “natural persons” (including small business customers) and deposits from non bank financial intermediaries (NBFIs). Retail deposits include “stable” deposits covered by a deposit guarantee scheme and “less stable” deposits (not guaranteed, from more sophisticated depositors or foreign-currency denominated). - Wholesale funding: “raised from nonnatural persons” (e.g., legal entities and institutional investors) and includes unsecured and secured funding. Unsecured liabilities are “not collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution.” Secured funding is collateralized by specific assets. - Short-term wholesale funding (defined here): overnight deposits, repo funding, and money market fund shares. - Liquidity: “the ability of a bank to fund assets and meet obligations as they come due without incurring unacceptable losses.” - Funding liquidity risk: risk that a bank will be unable to meet expected and unexpected current and future cash flow and collateral needs without affecting daily operations or the financial condition of the bank. - Assessment approach: - Funding adequacy should be assessed holistically alongside capital and liquid assets. - Robustness of funding depends on both asset characteristics (liquidity, maturity, type) and liability composition (retail vs wholesale, secured vs unsecured, maturity). ### Why focus on Europe now - Rationale: - Prolonged market turmoil since 2007 illustrated the speed at which bank funding and liquidity can evaporate; many banks experienced funding difficulties despite adequate capital ratios. - Structural vulnerabilities in funding models, particularly in Europe, amplified pressures and resulted in costly public interventions (funding guarantees, liquidity facilities, backstop deposit guarantee schemes, capital injections, asset protection schemes). - Europe appears the most vulnerable region, with heterogeneity between “core” and “peripheral” countries. ### Key comparative funding metrics and empirical findings - Sample description: - Sample of 109 banks from 23 countries: 48 banks in Europe, 27 in the Western Hemisphere and 34 in Asia Pacific; mix of 8 Investment Banks, 30 Retail Banks and 71 Universal Banks; covers all 28 G-SIFIs. - Loan-to-Deposit Ratios (LDRs): - Europe average LDR: 118 percent (down from 140 percent in 2006). - United States average LDR: 62 percent (down from 80 percent). - Japan average LDR: 78 percent (down from 116 percent). - Emerging markets average LDR: 100 percent (up from 87 percent). - Interpretation: LDR above 100 percent indicates wholesale funding is needed to complement insufficient deposits; Europe’s average LDR is well above the United States and Japan. - Funding gap (customer loans minus customer deposits): - Aggregate “funding gap” for the sample of large European banks: over $3 trillion. - U.S. bank sample runs a funding surplus of $1.8 trillion. - Trend: funding gap peaked in 2008 and is gradually narrowing through deleveraging, asset sales, portfolio de-risking, and weaker credit growth. - Reliance on wholesale funding: - European banks average reliance on wholesale funding: 61 percent of total liabilities. - Asia average reliance: 33 percent. - Emerging economies average reliance: 37 percent. - Large U.S. banks average reliance: 31 percent. - Note: Australian, Japanese, and South Korean SIBs remain more reliant on wholesale funding than other Asian peers due to more developed capital markets. - Asset-to-deposit ratios (ADRs): - European banks exhibit high ADRs, reflecting a large asset base geared toward non-lending operations rather than a small deposit base; ADRs amplify vulnerability beyond elevated LDRs. - Additional metrics highlighted: - Core funding ratio (stable funding liabilities—deposits, term debt and equity—as % of total assets). - Short-term wholesale funding to total liabilities. - Deposit funding ratio (deposits as % of total assets). - Interbank exposures and funding costs (deposit rates versus 3-month EURIBOR). - Cross-sectional caveats: - Aggregate country data mask significant differences across individual banks. - 2006 is used as a pre-crisis benchmark to underline trends, not as a target. - Metrics are not adjusted for accounting standard differences (IFRS versus US GAAP). - Definitions of customer deposits vary across jurisdictions. ### Short-term wholesale funding: patterns and risks (section 22) - Short-term funding vulnerability: - Heavier reliance on funding with maturity less than one year increases susceptibility to shocks, abrupt withdrawal of funding, and rollover risks. - Proportion of short-term funding: - Europe: declined from 25 percent in 2006 to 19 percent. - France: still above 30 percent. - United States: 16 percent (from 22 percent). - Emerging economies: increased from 8 percent in 2006 to over 17 percent in 2012. - Deposits and core funding comparisons: - Deposits finance a proportion of assets: Europe: 36 percent; North America and Asia: 62 percent. - Core funding ratio: United States nearly 80 percent of assets (mostly deposits); Europe 60 percent (larger proportion of term debt). - Sample basis: 16 European and 14 U.S. banks for the core funding comparison. - Wholesale debt issuance and structure: - European bank debt issuance (senior and subordinated) is substantially larger than U.S., Asia, and emerging economies. - Term debt composition: - Europe: senior unsecured debt accounts for 41 percent of term debt. - United States: senior unsecured debt accounts for 66 percent of term debt. - Interbank divergence and funding pressures: - EURIBOR spread significantly down from its 2011 peak after ECB actions. - Deposit rate (less than one-year maturity) for peripheral countries remains around 150 basis points above core. - Drivers of improvement: central bank support, investors’ search for yield, and relative scarcity of bonds as primary supply declined. - Risks replacing public funding with private funding: - ECB liquidity must be repaid by 2015. - Current aggregate net issuance for senior unsecured debt turned the most negative in 15 years, possibly indicating replacement of expensive debt funding with cheaper LTROs. - Stronger banks expected to pay down LTRO funds in early 2013; weaker banks may rely on public support longer. - Basel III liquidity requirements and European banks: - LCR observation period debuted in 2011; regulatory minima in 2015. - NSFR regulatory minima in 2018. - EBA (2012) quantitative impact study (June 2011 data, 157 European banks): - Average LCR: 70–71 percent, representing an aggregate shortfall of liquid assets of €1.2 trillion, or 3.7 percent of the sample’s €31 trillion in total assets. - Average NSFR: 89–90 percent, representing a need for stable funding of approximately €1.9 trillion. - European banks have boosted liquid assets above pre-2008 levels but not yet at Basel III-required levels. - Structural pressures: - Asset encumbrance estimates in Europe range between 15 percent and 25 percent of funded liabilities (or assets); some banks report higher levels. - Example ECB reliance: close to 30 percent of funded assets in Greece and above 10 percent in Ireland and Spain. - Burden sharing and depositor ranking: - Placing retail (domestic) deposit liabilities above unsecured debt could increase depositor confidence and stabilize retail funding, but would reduce unsecured creditors’ recovery prospects and may reduce wholesale funding availability. ### Regulatory initiatives, bail-in design, and funding implications (section 40) - Regulatory changes and objectives: - Implementation of Basel III PNV write-down/conversion rules, debt restructuring associated with official sector recapitalization, and development of a bail-in regime in Europe. - Bail-in definition and timeline: - Bail-in: statutory power to write down or convert certain bank liabilities to equity. - EC proposed draft directive (June 2012): expected to come into force on December 31, 2014, and bail-in from January 2018. - Liikanen report (October 2012) recommends phased-in bail-in requirements and supports designated bail-in instruments. - Scope and exemptions under EC proposals (high-level): - Eligible liabilities: senior and subordinated unsecured debt with maturity greater than one month; OTC derivatives liabilities (according to maturity); deposits exceeding the guarantee ceiling (€100,000 per depositor per bank); DGS schemes included. - Exempted liabilities: short-term liabilities (less than one month to maturity); derivatives cleared through CCPs and derivatives excluded by national authorities; guaranteed deposits up to the limit; secured liabilities up to the value of collateral (e.g., covered bonds); client assets and money, and other operating liabilities. - EC proposals broadly consider existing subordinated and senior unsecured debt as “bail-inable”; Liikanen supports designated bail-in instruments or issuance of common equity. - EC article 99 (2) suggests uninsured deposits would be subject to bail-in and DGS would rank pari passu to other creditors eligible for bail-in. - Waterfall and conversion rules: - Equity, preference shares, and hybrid Tier 1, followed by subordinated debt (Tier 2), will absorb losses first; contingent capital instruments converted or written down before other bail-inable senior unsecured debt. - EC opted to respect hierarchy of claims in insolvency and abandoned “sequential” bail-in option. - Bail-in quantum and thresholds: - EC leaves amount of bail-inable debt to national authorities case-by-case. - Earlier consultation documents considered 10 percent of total liabilities (excluding regulatory capital) as an appropriate threshold. - PLAC recommendations from the ICB in the United Kingdom targeted total capital plus best quality bail-in debt at 17% of RWAs. - Market and funding implications: - Expected objectives: reduce public cost of bank rescue, remove perceived implicit guarantees for “too big to fail” banks, reduce moral hazard, improve market discipline, and help decouple sovereign and bank funding. - Cost implications: - Analysts estimate bail-in cost could come to an average of 500 basis points. - In steady times, it would cost on average 160 basis points more to issue bail-in debt versus similar maturity senior unsecured debt, with wide variations among banks. - Funding costs driven by PD and LGD: - Implementation of bail-in may reduce PD by enabling early intervention but increase LGD for bailed-in creditors. - Net senior unsecured issuance has been negative since 2011; investors incentivized to increase secured funding, tying up more of banks’ balance sheets and increasing competition for collateral. - Business-model implications (Liikanen separation): - Legal separation may give retail activities cheaper, more stable deposit funding if segregated; investment banking activities likely face higher funding costs and reduced intra-group liquidity transfers. - Mitigating bank actions: - Pass on funding cost to customers, reduce new lending, allow assets to mature, dispose assets, change source of funding. ### Building a market for bail-inable debt and related challenges (section 56) - Market-building challenges: - By 2018, when bail-in comes into place, some 80 percent of eligible liabilities will have matured (Henriques, 2012 a). - Limited investor appetite and regulatory uncertainty may hamper weaker banks’ ability to fund themselves. - Weaker banks—most in need of bail-in instruments—will experience the most difficulty finding private investors. - Effects on funding mix, resolution, and economic costs: - Higher balance sheet encumbrance reduces available assets in liquidation and increases potential government protection costs. - Forced liquidations depress asset values and reduce lending capacity. - Burden-sharing may reduce public fiscal costs but could raise funding costs and constrain credit availability. - Staged approach to address liquidity and funding problems: - Phase 1 — “Containment”: public liquidity and/or funding guarantees to stem panic and contagion. - Phase 2 — Stabilization and restructuring: distinguish insolvent and viable banks; wind down insolvent banks; recapitalize and restructure viable banks. - Phase 3 — Structural reforms: address impaired assets and strengthen capital and liquidity management; explore structural business-model reforms. - Key attributes of a successful funding model (balance sheet characteristics): - Assets: strong asset quality; high level of liquid assets; limited leverage; limited maturity and currency mismatches; simple assets and appropriate disclosure. - Liabilities: diversity of funding by investor, instrument, geography, currency; stability of investor base; limited asset encumbrance; high capital and deposits; limited complex funding instruments. - Asset-liability management principles: - Medium- to long-term (MLT greater than 1 year) funding (capital, deposits, long-term wholesale funding) should exceed MLT assets (fixed assets, loans, HTM securities). - More short-term assets than short-term wholesale funding that could be unavailable in a prolonged market shutdown. - Funding strategies must be dynamic and forward looking, including stress tests and scenario forecasts. ### Policy options, public sector actions, and market measures (section 82 and across paper) - Cheap funding to support domestic lending: - Funding for Lending Scheme (FLS) example: participants can borrow up to 5% of their stock of existing lending to the real economy; price depends on volume of lending to the real economy. - Quasi-fiscal nature: temporary schemes require clear exit strategies to avoid long-term public involvement in funding markets. - Asset remediation: - Asset Management Companies (AMC) and Asset Protection Schemes (APS) can ring-fence or move troubled assets off-balance sheet to alleviate funding pressures. - Leverage and operating model: - Reduce leverage and shrink balance-sheet size to lower insolvency risks and refinancing needs, noting potential incentive for higher risk-taking to offset profitability effects. - Consider separation of retail and investment banking; narrow retail model reduces funding pressures if loans primarily financed by deposits. - Asset encumbrance: - Harmful effects of excessive asset encumbrance noted; some countries adopted regulatory caps on encumbrance levels. - Deposit Guarantee Schemes (DGS) and safety nets: - Strengthening DGSs is important to foster deposit stability; EC efforts include harmonization, faster payouts, improved financing, and borrowing arrangements. - Recommendation: Pan-European (or euro area) insurance or reinsurance mechanisms would provide risk diversification, lower resolution costs, and reduce distortions across retail markets. - De-link banks and sovereigns (banking union): - Banking union elements: (i) single rule book; (ii) single supervisory mechanism (SSM); (iii) common resolution framework; and (iv) common backstops. - Deeper integration and convergence of national frameworks likely gradual but would reduce sovereign–bank feedback loops and lower wholesale funding costs in weaker countries. - Capital and liability management: - Stronger capitalization reduces PD and LGD, helping normalize funding costs. - Active liability management: debt buybacks, opportunistic pre-funding, widening investor base, private placements. - Contingent capital (CoCos) could create loss-absorbing buffers and reduce likelihood of senior debt bail-in; more CoCos could fill gap toward bail-in thresholds. - Transparency and communication: - Enhanced disclosure on funding instruments, funding strategies, and encumbered assets recommended to reassure investors and reduce pro-cyclicality. ### Conclusions and broader implications - Liquidity injections from the ECB reduced immediate funding concerns, but underlying funding challenges have abated rather than disappeared. - Both cyclical and structural factors altered availability, composition, and cost of funding; some effects are temporary, others require funding model adjustments. - Funding models are damaged but not irreparably broken; recovery depends on timely actions by banks and policymakers addressing weaknesses. - Policy priority: target measures to the weakest banks to break the vicious circle between weak funding metrics and greater failure risks, restore confidence, and stabilize funding markets. - Joint efforts needed: improve macroeconomic backdrop, de-link banks and sovereigns, reduce regulatory and operating uncertainties, and restructure balance sheets. - Further studies recommended: explore business-model and group-structure changes to improve bank funding and resilience; examine funding inter-linkages and asset/collateral movements between banking and nonbank financial sectors. *Italic: Source: _wp12299 - sections 1, 22, 40, 56, and 82.* ### 1. Select Countries With Some Form of Depositor Preference ...............................................18 ### 1. Select Countries With Some Form of Depositor Preference ...............................................18 ### Introduction: purpose and scope - Objective: assess whether bank funding models are irrevocably or temporarily damaged by (i) highlighting the importance of funding; (ii) comparing funding models between Europe and other regions; (iii) discussing cyclical and structural shifts in European funding models; (iv) presenting main implications of dysfunctional funding models in Europe; and (v) concluding with a range of options that could be considered to strengthen funding models. - Scope exclusions: broader liability structure (including derivatives and off-balance sheet liabilities, deposits and capital) and structural business model changes (e.g., Liikanen, Vickers and Volcker proposals) are beyond the scope of this study. ### Bank funding and liquidity risk: concepts and measurement - Definitions and mechanics: - Retail deposits: from “natural persons” (including small business customers) and deposits from non bank financial intermediaries (NBFIs). Retail deposits include “stable” deposits covered by a deposit guarantee scheme and “less stable” deposits (not guaranteed, from more sophisticated depositors or foreign-currency denominated). - Wholesale funding: “raised from nonnatural persons” (e.g., legal entities and institutional investors) and includes unsecured and secured funding. Unsecured liabilities are “not collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution.” Secured funding is collateralized by specific assets. - Short-term wholesale funding (defined here): overnight deposits, repo funding, and money market fund shares. - Liquidity: “the ability of a bank to fund assets and meet obligations as they come due without incurring unacceptable losses.” - Funding liquidity risk: risk that a bank will be unable to meet expected and unexpected current and future cash flow and collateral needs without affecting daily operations or the financial condition of the bank. - Assessment approach: - Funding adequacy should be assessed holistically alongside capital and liquid assets. - Robustness of funding depends on both asset characteristics (liquidity, maturity, type) and liability composition (retail vs wholesale, secured vs unsecured, maturity). ### Why focus on Europe now - Rationale: - Prolonged market turmoil since 2007 illustrated the speed at which bank funding and liquidity can evaporate; many banks experienced funding difficulties despite adequate capital ratios. - Structural vulnerabilities in funding models, particularly in Europe, amplified pressures and resulted in costly public interventions (funding guarantees, liquidity facilities, backstop deposit guarantee schemes, capital injections, asset protection schemes). - Europe appears the most vulnerable region, with heterogeneity between “core” and “peripheral” countries. ### Key comparative funding metrics and empirical findings - Sample description (figure basis): - Sample of 109 banks from 23 countries with systemically important financial sectors: 48 banks in Europe, 27 in the Western Hemisphere and 34 in Asia Pacific; mix of 8 Investment Banks, 30 Retail Banks and 71 Universal Banks; covers all 28 G-SIFIs. - Loan-to-Deposit Ratios (LDRs): - Europe average LDR: 118 percent (down from 140 percent in 2006). - United States average LDR: 62 percent (down from 80 percent). - Japan average LDR: 78 percent (down from 116 percent). - Emerging markets average LDR: 100 percent (up from 87 percent). - Interpretation: LDR above 100 percent indicates wholesale funding is needed to complement insufficient deposits; Europe’s average LDR is well above the United States and Japan. - Funding gap (customer loans minus customer deposits): - Aggregate “funding gap” for the sample of large European banks: over $3 trillion. - U.S. bank sample runs a funding surplus of $1.8 trillion. - Trend: funding gap peaked in 2008 and is gradually narrowing through deleveraging, asset sales, portfolio de-risking, and weaker credit growth. - Reliance on wholesale funding: - European banks average reliance on wholesale funding: 61 percent of total liabilities. - Asia average reliance: 33 percent. - Emerging economies average reliance: 37 percent. - Large U.S. banks average reliance: 31 percent. - Note: Australian, Japanese, and South Korean SIBs remain more reliant on wholesale funding than other Asian peers due to more developed capital markets. - Asset-to-deposit ratios (ADRs): - European banks exhibit high ADRs, reflecting a large asset base geared toward non-lending operations rather than a small deposit base; ADRs amplify vulnerability beyond elevated LDRs. - Additional ratio and metric considerations highlighted: - Core funding ratio (stable funding liabilities—deposits, term debt and equity—as % of total assets). - Short-term wholesale funding to total liabilities. - Deposit funding ratio (deposits as % of total assets). - Interbank exposures (loans to and deposits from other banks) and funding costs (deposit rates versus 3-month EURIBOR). - Cross-sectional and measurement caveats: - Aggregate country data mask significant differences across individual banks. - 2006 is used as a pre-crisis benchmark to underline trends, not as a target to which banks should converge. - Metrics are not adjusted for accounting standard differences (IFRS versus US GAAP), which can affect comparisons relative to total assets. - Definitions of customer deposits vary across jurisdictions; some instruments may be classified as wholesale in one jurisdiction and retail in another. - Country financial system structure and bank business models affect relevance of specific ratios (e.g., LDR more meaningful for retail-focused banks; wholesale funding ratios more meaningful for investment banks). ### Implications and observed dynamics - Funding and capital interdependence: - Robust capital generally leads to more favorable funding terms; cheaper funding improves profitability and internal capital generation. - The frontier between funding (term debt) and capital is blurring as subordinated and senior debt converge toward more loss-absorption features due to regulatory developments, debt restructuring initiatives, and bail-in proposals—implications for balance sheet composition, priority of claims, and cost of capital. - Systemic and policy context: - Since 2008, public intervention to support funding and liquidity was widespread and costly. - Understanding funding drivers and regulatory impacts helps identify bank actions and policy responses to consolidate funding models and restore credit flows in Europe. *Italic: Source: _wp12299 - 1. Select Countries With Some Form of Depositor Preference ...............................................18* ### 22. Short-term wholesale funding remains elevated in Europe. ### 22. Short-term wholesale funding remains elevated in Europe. ### Short-term funding patterns and risks - Heavier reliance on shorter-term funding (with a maturity less than one year) increases susceptibility to external shocks, abrupt withdrawal of funding, and rollover risks (such as shortening of maturities and a higher pricing of new issues). - Proportion of short-term funding: - Europe: declined from 25 percent in 2006 to 19 percent. - France: still above 30 percent. - United States: 16 percent (from 22 percent). - Emerging economies: increased from 8 percent in 2006 to over 17 percent in 2012 to expand lending activities. - Note: Levels of short-term funding change quickly, and more recent trends may not be fully reflected. ### Core funding and deposit funding comparisons - Deposits finance a proportion of assets: - Europe: 36 percent. - North America and Asia: 62 percent. - Core funding (deposits, total equity—including goodwill—and unsecured long-term debt): - United States: core funding ratio reaches almost 80 percent of assets and is mostly composed of deposits. - Europe: core funding ratio is 60 percent, where the proportion of term debt is larger. - Sample basis: analysis based on a sample of 16 European and 14 U.S. banks; broader European sample including smaller deposit-rich retail banks would likely reduce the funding gap. ### Wholesale funding issuance and structure - European bank debt issuance (senior and subordinated) is substantially larger than issuance by banks in the United States, Asia, and emerging economies. - Emerging economy banks’ liability structure: mostly equity, senior debt, a small proportion of dated subordinated debt, and no perpetual hybrid Tier 1. - Covered bonds: a European funding vehicle; U.S. banks tend to prefer off-balance sheet securitizations. - Term debt composition (primary instrument shares): - Europe: senior unsecured debt accounts for 41 percent of term debt. - United States: senior unsecured debt accounts for 66 percent of term debt. - Source for breakdowns and issuance profiles: Dealogic. ### Interbank market divergence and funding pressures - Interbank market conditions diverge between “core” and “peripheral” Europe. - EURIBOR spread significantly down from its 2011 peak after ECB actions. - Deposit rate (less than one-year maturity) for euro area core countries has trended down with the three-month EURIBOR spread. - Deposit rate for peripheral countries remains around 150 basis points above core, as funding tensions continue to fragilize peripheral countries. - Funding pressures have recently eased but not disappeared: - Ample central bank funding improved wholesale funding conditions and allowed for a reduction in deposit rates. - Cheap liquidity supported various forms of “carry trade”, including swapping or buyback of expensive debt or the purchase of government bonds. - Recent easing helped reduce spreads and allowed a return to first half of 2011 levels. - Drivers of improvement: central bank support, investors’ search for yield, and a relative scarcity of bonds as primary supply declined. ### Risks in replacing public funding with private funding - ECB liquidity must be repaid by 2015. - Current aggregate net issuance for senior unsecured debt has turned the most negative in 15 years, which may indicate replacement of expensive debt funding with cheaper LTROs and imply certain banks could face difficulties repaying LTROs. - Pick-up in unsecured debt issuance in the second half of 2012 is promising but not uniform across banks. - Funding conditions remain polarized: - Stronger banks: on way to normalization and expected to pay down LTRO funds in early 2013 (unless kept to manage exposure to peripheral Europe and redenomination risk). - Weaker banks: likely to rely on public support much longer and may find it profitable to wait until LTRO maturity. ### Basel III liquidity requirements and European banks - Basel III liquidity rules adoption timeline: - Liquidity Coverage Ratio (LCR): observation period debuted in 2011; regulatory minima in 2015. - Net Stable Funding Ratio (NSFR): regulatory minima in 2018. - European banks in aggregate do not yet comply with LCR and NSFR based on available data. - European Banking Authority (EBA, 2012) quantitative impact study (June 2011 data, 157 European banks): - Average LCR: 70–71 percent, representing an aggregate shortfall of liquid assets of €1.2 trillion, or 3.7 percent of the sample’s €31 trillion in total assets. - Average NSFR: 89–90 percent, representing a need for stable funding of approximately €1.9 trillion. - Comparative note: Santos and Elliott (2012) show estimates of net liquid assets and net funding needed in the United States and Japan are lower than for Europe. - European banks have boosted liquid assets to buffer against negative shocks; liquid asset ratios are above pre-2008 levels but not yet at Basel III-required levels. ### Cyclical and structural drivers exacerbating vulnerabilities - European banks have faced simultaneous shocks: shutdown of capital markets, deposit outflows, significant declines in asset values, and weak sovereigns. - Operational factors created negative headwinds for access to and cost of funding; the European sovereign crisis exposed the link between weak banks and weak sovereigns. - Bank spreads in the European periphery co-move with sovereign spreads; deposit rates are higher in the periphery. ### Rating downgrades and investor preference shifts - Ratings are migrating downward; senior ratings are falling by two to four notches, depending on the banks and credit rating agencies. - Lower ratings may limit access to funding, increase refinancing costs, restrict counterparty roles, and force issuance of more secured funding. - Investor preferences shifting away from euro area banks’ senior unsecured debt: - Long-term investors (e.g., insurance companies) likely to increase covered bond holdings due to Solvency II capital treatment and reduce term unsecured debt holdings. - Punitive treatment of equity may discourage insurers from purchasing bank debt with contingent capital or bail-inable features. - Short-term investors (MMFs) reduced exposures to European short-term bank debt; euro area banks’ allocations declined by 70 percent below May 2011 allocations according to Fitch. - Result: higher CDS premia and increasing reliance on secured transactions (repos). ### Emergence of new funding instruments and risks - New and untested funding instruments are emerging as traditional sources become scarcer (example: “collateral swaps” between banks and insurance companies in the United Kingdom). - Collateral swaps: banks swap lower quality, less liquid assets for higher quality, more liquid collateral from other financial institutions; seen as entailing risks, especially for insurance companies. ### Structural pressures: subordination, burden-sharing, and asset encumbrance - Two primary structural pressures on funding: increased subordination and greater burden-sharing. - Subordination of senior unsecured debt arises from: - Asset encumbrance. - Developing preferred creditor status. - Asset encumbrance: - Both central bank and covered bond funding immobilize large asset pools (through haircuts and over-collateralization) not available to unsecured creditors. - Example ECB reliance: close to 30 percent of funded assets in Greece and above 10 percent in Ireland and Spain. - Analyst estimates of asset encumbrance averages in Europe range between 15 percent and 25 percent of funded liabilities (or assets), with some banks reporting higher levels. - Encumbrance is not riskier per se (e.g., Danish mortgage banks), but elevated encumbrance may limit funding options and deter unsecured creditors. - Burden sharing and depositor ranking: - Ranking of depositors pari passu with senior unsecured creditors is under review in Europe. - Placing retail (domestic) deposit liabilities above unsecured debt could increase depositor confidence, stabilize retail funding, reduce taxpayer risk, and ease use of resolution tools. - However, depositor preference would dramatically reduce unsecured creditors’ recovery prospects in a liquidation, particularly in banks with broad deposit franchises, and wholesale funding may become less forthcoming if depositor preference became the norm. - Several countries have adopted or are considering depositor preference legislation (listed categories: Asia, Europe, Emerging Economies, Western Hemisphere with examples in the source). ### Potential consequences for creditors - Greater burden sharing and subordination may increase losses for senior and subordinated bondholders. *Source: _wp12299 - 22. Short-term wholesale funding remains elevated in Europe.* ### 40. International and European regulatory initiatives should strengthen the liquidity ### 40. International and European regulatory initiatives should strengthen the liquidity and funding profiles of European banks over time ### Regulatory changes and objectives - New regulatory initiatives aim to strengthen liquidity and funding profiles of European banks and increase loss-absorption capacity. - Lower leverage and higher capital are expected to improve banks’ liability management, but the ongoing crisis complicates the transition to a steady state and makes the individual and combined impact of new regulations hard to disentangle. - Key regulatory changes with significant implications: - Implementation of Basel III requirements that regulatory capital instruments be fully written down or converted to equity at the “point of non-viability” (PNV). - Debt restructuring associated with official sector recapitalization. - Development of a bail-in regime in Europe. ### Bail-in regimes: design, scope, and timing - Bail-in definition: a statutory power of a resolution authority to restructure the liabilities of a distressed financial institution by writing down certain bank liabilities and/or converting them to equity. - Bail-in is one of the resolution tools under consideration and is included by the FSB (2011 a and b) as a key attribute of effective resolution regimes. - Bail-in features and design choices: - Regulators have discretion to determine when the bail-in should occur: on a “going concern” basis or on a “gone concern” basis. - The EC proposed a draft directive in June 2012 implementing a European framework for Bank Recovery and Resolution; the directive is expected to come into force on December 31, 2014, and bail-in from January 2018. - The Liikanen report (October 2012) argued that bail-in requirements should be “phased in over an extended period of time” and supported the use of designated bail-in instruments. - Scope and exemptions under EC proposals (high-level): - Eligible liabilities: senior and subordinated unsecured debt with a maturity greater than one month; OTC derivatives liabilities (according to maturity); deposits exceeding the guarantee ceiling (€100,000 per depositor per bank); DGS schemes are included. - Exempted liabilities: short-term liabilities (less than one month to maturity); derivatives cleared through CCPs and derivatives excluded by national authorities; guaranteed deposits up to the limit; secured liabilities up to the value of collateral (e.g., covered bonds); client assets and money, and other operating liabilities (e.g., due to employees, tax authorities). - EC proposals broadly consider all existing subordinated and senior unsecured debt as “bail-inable”; Liikanen supports designated bail-in instruments or issuance of common equity. - Unclear whether bail-in proposals will lead to more depositor preference across the EU; EC article 99 (2) suggests uninsured deposits would be subject to bail-in and DGS would rank pari passu to other creditors eligible for bail-in. - Waterfall and conversion rules under EC proposals: - Equity, preference shares, and hybrid Tier 1, followed by subordinated debt (Tier 2), will absorb losses first, irrespective of whether capital triggers have been breached; shares should either be significantly diluted or cancelled (article 42). - Contingent capital instruments will be converted into equity or written down before other bail-inable senior unsecured debt. - For senior unsecured creditors, the EC opted to respect the hierarchy of claims in insolvency and abandoned the “sequential” bail-in option. - Bail-in quantum and thresholds: - The EC leaves the amount of bail-inable debt to national authorities on a case-by-case basis. - Earlier consultation documents considered 10 percent of total liabilities (excluding regulatory capital) as an appropriate threshold for bail-inable debt. - For comparison, PLAC recommendations from the ICB in the United Kingdom targeted total capital plus best quality bail-in debt at 17% of RWAs. ### Market and funding implications of bail-in and related measures - Expected effects of bail-in: - Positive objectives: reduce public cost of bank rescue and contingent liabilities, remove perceived implicit guarantee for “too big to fail” banks, reduce moral hazard, improve market discipline, and help decouple the link between sovereign and bank funding. - Effectiveness remains to be tested; bail-in regimes need robust design balancing efficiency and financial stability and reflecting market realities. - Timing considerations: implanted too early could unwind positive effects of ECB’s LTRO interventions; implemented too late (2018) would not be an immediate crisis resolution tool. - Impact on creditor classes: - Historically, in debt restructuring associated with public sector recapitalizations, senior bondholders have often been left untouched outside resolution because they rank pari passu with depositors in most of Europe; subordinated bonds have been subject to burden sharing on a voluntary or coercive basis. - The expected adoption of bail-in measures will affect senior unsecured creditors going forward. - Funding cost implications: - Analysts’ estimates and market comparisons: - Comparison of incremental cost of existing contingent capital instruments versus senior debt shows bail-in cost could come to an average of 500 basis points. - In steady times, it would cost on average 160 basis points more to issue bail-in debt versus similar maturity senior unsecured debt, with wide variations among banks. - Funding costs are driven by probability of default (PD) and loss given default (LGD): - PD reflects overall bank resilience; LGD can be driven up by increased subordination, asset encumbrance, and depositor preference changes. - ECB’s LTROs drove PD down but most likely drove LGD up (due to asset encumbrance). - Implementation of bail-in may reduce PD by intervening early but increase LGD for bailed-in creditors. - Bank funding costs have risen substantially since 2009; higher funding spreads and higher deposit prices have increased overall cost of liabilities. - Spread differentials between tiers of debt may converge: - Going forward, senior spreads should converge up towards subordinated spreads as senior LGD increases; in the short term there has been decompression between senior and subordinated spreads due to past restructurings. - Covered bond spreads should continue to benefit from a relative “safe haven” status and trade tighter than senior unsecured debt. - Changes in liability structure and funding patterns: - Net senior unsecured issuance has been negative since 2011; investors are incentivized to increase the portion of secured funding, tying up more of banks’ balance sheets and increasing competition for collateral. - Banks may face higher term funding costs, affecting margins and profitability and prompting changes in asset and liability composition. ### Business-model implications: Liikanen separation and funding differentiation - Liikanen report proposals (legal separation of retail and investment banking) may present new funding challenges: - Retail activities, primarily funded via deposits, could benefit from cheaper and more stable funding if segregated. - Investment banking activities, viewed as riskier and less likely to receive public support, would probably face increased funding costs and have less access to intra-group funding and liquidity transfers. - The radical overhaul could lead to more differentiated intra-group funding structures and may introduce implementation challenges and risks of regulatory arbitrage. ### Mitigating actions by banks - Banks’ possible mitigating avenues for higher funding costs: - Pass on part or all of additional funding cost to customers through re-pricing assets. - Reduce new lending. - Allow assets to mature. - Dispose of certain assets. - Change the source of funding. - Banks are proactively engaging in liability and asset restructuring as part of mitigation efforts. ### Implications for public finances and central bank involvement - Historical burden of bank losses: - Bank losses have been primarily borne by national taxpayers through bail-out and restructuring. - Examples: - Ireland: LMEs generated over €15 billion during 2008–11, representing 10 percent of GDP, while state recapitalization accounted for 40 percent of GDP. - Spain: burden sharing by subordinated bondholders is expected to amount to €10 billion, compared to €37 billion in capital to be injected by the European Stability Mechanism (ESM) and the Spanish FROB. - Central bank support and risks: - The ECB expanded its crisis-mitigation toolkit, including the covered bond purchasing program (CBPP), securities markets program (SMP), LTROs, and outright monetary transactions (OMT). - The SMP and CBPP are now terminated, and the OMT has not been used yet. - Repeated official sector actions have alleviated funding strains, but absence of normalization could result in ECB support becoming a permanent feature of funding models. - Institutionalized central bank funding increases balance sheet encumbrance, subordinates unsecured creditors, complicates future bank self-financing, and could ultimately burden the public sector with more real or contingent debt. *Italic source: _wp12299 - 40. International and European regulatory initiatives should strengthen the liquidity and funding profiles of European banks over time.* ### 56. Building a market for bail-inable debt may prove challenging. By 2018, when bail-in ### _wp12299 - 56. Building a market for bail-inable debt may prove challenging. By 2018, when bail-in ### Challenges for building a bail-inable debt market - By 2018, when bail-in comes into place, some 80 percent of eligible liabilities will have matured (Henriques, 2012 a). - Limited investor appetite and uncertainty regarding the future regulatory framework may hamper the ability of weaker banks, or banks headquartered in weaker sovereigns, to fund themselves. - Weaker banks—those most in need of bail-in instruments to reduce the likelihood of bail-out—will also experience the most difficulty in finding private sector investors willing to purchase bail-inable securities. ### Effects on bank funding mix, resolution, and economic costs - Higher balance sheet encumbrance: - Reduces available assets in a liquidation. - Increases potential costs for governments of protecting depositors if they must do a full bail-out or complete insufficient deposit guarantee schemes. - Bank failures elevate social and economic costs: - Forced liquidation of assets depresses the value of other asset classes and propagates crisis to other parts of the financial sector. - Reduces overall lending capacity to the economy. - Burden-sharing initiatives: - Aim to contain negative externalities of bank failures and spread rescue costs between private and public sectors. - If bail-in precedes bail-out, public finances are more robust and can redirect efforts to support economic growth. - Could translate into higher funding costs and constrain the availability and cost of credit from banks to the economy. - Bank lending behavior: - Rises in good times and falls in bad times. - Motivated by creditworthiness, profitability, slack in balance sheet capacity (capital and liquidity), and willingness to take on more risks. - Political and social pressures: - May constrain choices between reducing assets or improving liabilities, as policymakers may encourage banks to maintain lending possibly at uneconomical costs. - Any decrease in volume or increase in cost not accompanied by re-pricing will affect banks’ profitability and ability to generate capital organically. - Weaker capitalization and profitability may erode investor confidence and appetite in bank debt, potentially generating insolvency and triggering state intervention. ### Objectives of reforms and guiding principles - Triple objective of the official sector: - Minimize bail-out costs on taxpayers’ money. - Ensure financial stability, preventing individual or systemic bank runs. - Encourage banks to lend to the economy. - Other policy considerations: - Avoid deep, fast, undifferentiated deleveraging. - Minimize reliance on public funding support. - Reduce banks/sovereign links. - Ensure migration of risks to shadow banking does not create new risks for financial stability and public finances. - Funding should be sourced from retail or institutional private sources in steady state; temporary official support may be warranted only in exceptional circumstances. - Actions must be simultaneous at bank and system levels: - Banks: improve asset quality/liquidity and liability stability/affordability. - Policymakers: reduce uncertainty, offer predictable regulatory environment with clear and fair rules, and support growth and appropriate interest rate levels. ### Staged approach to addressing liquidity and funding problems - Phase 1 — “Containment”: - Alleviate acute liquidity stress by providing a large amount of liquidity and/or funding guarantees from the public sector to stem market panic and contagion risks. - Phase 2 — Stabilization and restructuring: - Stabilize liabilities and restructure balance sheets by distinguishing between insolvent and viable banks; wind down insolvent banks; recapitalize and restructure viable banks. - Phase 3 — Structural reforms: - Longer-term actions to address impaired assets and strengthen capital and liquidity management; explore structural reforms of bank business models. ### Key attributes of a successful funding model (balance sheet characteristics) - Assets: - Strong asset quality, based on the resilience of (i) borrowers and (ii) collateral value. - High level of liquid assets easily sold with minimum loss in value, even in times of stress. - Limited leverage. - Limited mismatches between assets and liabilities by (i) maturity and (ii) currency. - Simple assets and appropriate disclosure. - Liabilities: - Diversity of funding by (i) investors; (ii) instruments; (iii) geographies; and (iv) currencies. - Stability of both retail and wholesale investor base, based on (i) their investment constraints and preferences; (ii) their own resilience; and (iii) their behavior. - Limited asset encumbrance. - High level of capital and deposits. - Limited level of complex funding instruments. ### Asset-liability management and funding principles - Funding success predicated on: - Having medium- to long-term (“MLT” is greater than 1 year) funding (defined as capital, deposits, and long-term wholesale funding) that exceeds MLT assets (defined as fixed assets, loans, and held-to-maturity securities). - Having more short-term assets (shorter than 1 year and usually deemed liquid) than short-term wholesale funding that could be unavailable in a prolonged market shutdown. - Funding strategies must be dynamic and forward looking, incorporating scenario forecasts from "business as usual" to "stress tests", covering idiosyncratic and systemic liquidity and funding risks. - Liabilities should be diverse, stable, and simple; funding instruments should not be overly complex. - Retail funding: - Typically safer, cheaper, and more stable, but exclusive reliance is not without risks (vulnerability to deposit runs; increased competition for deposits could raise customer fees and reduce deposit stability). - Deposit outflow risk highlighted in Europe, especially in peripheral countries; deposit guarantee schemes and public interventions have mitigated risks but deterioration in public finances or perceived insufficiency of guarantees may alter this trend. ### Regulatory guidance and fine-tuning - BIS/BCBS principles for sound liquidity risk management and supervision (BCBS 2008) include: - A clearly defined liquidity risk tolerance limit. - Maintenance of adequate level of liquidity, including a cushion of liquid assets. - Proper allocation of liquidity costs, benefits, and risks to all significant business activities. - Identification and measurement of full range of liquidity risks, including contingent liquidity risks. - Design and use of severe stress test scenarios. - Need for a robust and operational contingency funding plan. - Sound management of intraday liquidity risk and collateral. - Strong public disclosure to promote market discipline. - Calls for recalibration of liquidity rules to address “financial fragmentation” (bank retrenchment within national boundaries, local sourcing of liabilities, regulatory preference for ring-fencing of liquidity and capital). - Basel Committee reviewing the LCR and considering a wider pool of eligible liquid assets. ### How European banks can converge towards more robust funding models - Two-pronged approach to reduce PD and LGD: - Reduce PD via (i) restructuring banks' balance sheet; (ii) increasing bank capital; (iii) de-linking banks and sovereigns; (iv) improving the macroeconomic environment; and (v) changing business and funding profiles. - Restructuring balance sheets: - Deleveraging and cleaning up balance sheets to improve funding prospects; further restructuring and streamlining of assets and liabilities to cement funding consolidation. - Group structure impacts: - Branch model: centralized funding, lower issuance costs if parent strong, greater intra-group transfers; recent ring-fencing reduces internal flow benefits. - Subsidiary model: decentralized funding raised locally to match local claims (retail deposits), better asset-liability matching, less reliance on international wholesale funding. - Authorities’ preferences depend on home/host status; single passport regime has led to predominance of branch model in the EU. - Asset growth dictated by availability, cost, denomination, and localization of liabilities; ring-fencing has led to local asset growth in deposit-rich jurisdictions and asset relocation to favorable funding jurisdictions; risk of “balkanization” of funding. - Asset-side actions: - Increase liquid assets to provide additional funding in times of stress; LCR buffer as counter-cyclical safeguard. - Caveat: concentration of liquidity in domestic government debt could deteriorate liquidity and solvency and increase sovereign-bank links. - Ensure conservative lending standards through the cycle; lower lending reduces funding needs and wider lending margins support profitability and capital generation; macro-prudential and counter-cyclical measures can control aggregate credit supply and price. - Revive securitization markets to transfer assets off-balance sheet; consider centralized government-supported mortgage agency; further research needed on merits and modalities of European GSEs. - Prime collateral securitization (PCS) initiative: - Label securities that meet criteria of transparency, structural simplicity, and underlying asset quality. - Centered on the real economy: residential mortgages (but not commercial), SME loans, auto loans, and credit cards. - Could foster primary issuance and liquidity and revive investor appetite, provided favorable capital treatment. - Foster corporate bond market growth: - For three years until October 2012, traditional pecking order inverted; many euro area corporates funded more cheaply than banks. - Capital markets may deepen as bank disintermediation accelerates; large corporates may turn to bond markets, especially if accompanied by tax incentives. - Banks with smaller large-corporate loan books might dedicate greater resources to SME financing. - Favorable capital treatment (possibly via review of risk-weighted assets) could support SME lending. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12299.pdf* ### 82. Authorities could make cheap funding available to banks to support domestic ### _wp12299 - 82. Authorities could make cheap funding available to banks to support domestic ### Cheap funding to support domestic lending (Funding for Lending Scheme) - Example: “Funding for lending scheme” (FLS) initiated by the Bank of England and HM Treasury could provide funding to banks and building societies “for an extended period, at a price below current market rates”. - Participating banks will be able to borrow up to 5% of their stock of existing lending to the real economy. - The price of each institution’s borrowing in the FLS will depend on its volume of lending to the real economy. - Caveat: these “quasi-fiscal” operations could undermine the long-term objective to reduce public involvement in funding markets; indicating the temporary nature of the scheme and planning a clear exit strategy would help anchor expectations that funding should ideally come from private sources. ### Asset quality problems and remediation - Problem: Impaired assets bloat balance sheets, require disproportionate capital and funding, limit profitability, and during market stress can trigger inability to refinance, fire sales, and mark-to-market losses. - Policy options: - Asset management companies (AMC) and asset protection schemes (APS) to ring-fence or move troubled assets off-balance sheet to offload impaired assets and allow banks to focus on core assets. - By de-risking and reducing balance sheets, AMCs and APSs may alleviate funding pressures. ### Leverage, balance-sheet size, and operating model - Reduce leverage and shrink balance sheet size: - Lower leverage may reduce insolvency risks and expected losses and improve creditors’ perception of bank riskiness. - Benefits: reduces asset pool size and refinancing needs, eases rollover risks, provides more funding flexibility and less volatility. - Risk: may induce increased investment in “high returns-high risks assets” to offset negative impact on profitability. - Reexamination of operating model: - Consider merits and limits of separating retail and investment banking (references: Liikanen, ICB (Vickers), Volcker rule). - A narrow retail banking model, where loans are primarily financed by deposits, would alleviate funding pressures relative to larger diversified banks. - Note: full discussion beyond this paper; further IMF research forthcoming. ### Asset encumbrance - Concern: Harmful effects of excessive asset encumbrance; regulatory caps on encumbrance levels adopted in some countries. - Mechanism: Scarcer “safe assets” leads to competition for collateral, which is pro-cyclical and amplifies downside risks in times of stress. ### Liability side — Deposit Guarantee Schemes (DGS) - Strengthening DGSs is important to foster deposit stability. - More robust DGSs are vital to preventing deposit outflows in times of stress. - EC efforts: harmonization and simplification of protected deposits, faster payouts, improved financing of schemes, borrowing arrangements and DGSs across the euro area are initial steps. - Recommendation: Pan-European (or euro area) insurance or reinsurance mechanisms over time would bring greater benefits, including more risk diversification, lower resolution costs, and less competitive distortions across retail markets. - Common safety nets would be more effective in delinking banks and sovereigns and in stemming capital flights and deposit outflows. ### De-link banks and sovereigns (Banking union) - Banking union initially designed around four elements: (i) a single rule book; (ii) a single supervisory mechanism (SSM); (iii) a common resolution framework; and (iv) common backstops. - “Deeper integration” could help break the negative feedback loop between banks and sovereigns. - Convergence of national legal and institutional frameworks will be necessary and is likely to be gradual. - With progress on all elements, crisis management mechanisms would be enhanced, banking sector stability improved, wholesale funding costs likely lower (particularly in weaker European countries), and common safety nets would help prevent retail deposit runs. ### More robust capital and funding management - Stronger capitalization would facilitate normalization of funding costs. - Observation: Parts of the European banking system are still undercapitalized. - Higher capital, both core and total, would reduce PD and LGD and help lower funding costs to more sustainable levels, even if returning to pre-crisis funding levels is not achievable. - Higher capital retention and issuance of new capital instruments would create a more robust buffer below senior unsecured debt. - Enhanced confidence in capital ratios, particularly in risk-weighted assets (RWAs) calculations, would benefit funding conditions; greater credibility, consistency, and transparency in RWA methodologies would bolster investor confidence. - Active liability management: - Debt buyback, particularly of expensive debt or instruments that no longer qualify as capital, helps reduce funding costs and leverage. - Benefits rely on banks having sufficient liquidity to repurchase expensive senior and subordinated debt. - Opportunistic pre-funding and more dynamic funding management observed; widening investor base and tailor-made private placements can provide flexibility. ### Contingent capital, bail-in, and the debt–capital frontier - Contingent capital (CoCos): - Issuing common equity in current conditions is costly and difficult; imposing losses on senior bondholders may create negative signaling and contagion. - Contingent capital may help create a buffer available in times of stress to absorb losses and protect more senior bondholders. - More CoCos would reduce likelihood of bail-in mechanisms affecting senior unsecured debt and could help fill the gap between capital plus subordinated debt and the 10 percent liabilitity threshold recommended for bail-in. - CoCos could offset capital shortfalls and enable CDS spread compression. - Bail-in: - Bail-in blurs boundary between debt and capital; senior debt previously ranked pari passu with depositors in many European countries. - Scope and extent of burden sharing are increasing and now encompass debt instruments becoming part of the resolution toolkit. - Funding is not a substitute for capital: - Standard & Poor’s argument: “the role of bail-inable debt might best be played by nonviability contingent capital instruments, such as hybrid capital instruments and subordinated debt, instead of specific rules for a bank's senior funding strategy.” - Maintaining a clear distinction between capital and funding characteristics leads to more clarity about capitalization and a more stable and efficient funding market. - If the objective is to preserve solvency, regulators should ask banks to issue more capital instruments (equity, contingent capital, or loss-absorbing subordinated debt). ### Improving transparency and communication - Increased and timely bank disclosure would reassure investors on bank resilience. - Enhanced disclosure about risks and returns associated with different funding instruments and funding strategies (normal and stressed times) would mitigate pro-cyclical behaviors. - Investors seek clarity on type, amount, and ranking of instruments and their position in insolvency scenarios. - Additional disclosure on encumbered assets (e.g., assets used for collateral in covered bonds and repo transactions) is recommended. - Regular communication with investors on funding and liquidity strategies would help reduce execution risks and secure investor support in crises. ### Conclusion and broader implications - Liquidity injections from the ECB have reduced immediate concerns on bank funding, but underlying funding challenges have abated rather than disappeared. - Both cyclical and structural factors have altered the availability, composition, and cost of funding; some effects are temporary, others require funding model adjustments. - Funding models are damaged but not irreparably broken; recovery depends on banks and policymakers addressing weaknesses in a timely manner. - Policy priority: target measures to the weakest banks to break the vicious circle between weak funding metrics and greater failure risks, thereby restoring confidence and stabilizing funding markets. - Joint efforts by banks, market participants, and regulators needed to normalize funding conditions: improve macroeconomic backdrop, de-link banks and sovereigns, reduce regulatory and operating uncertainties, and restructure balance sheets. - Further studies recommended: explore how changes to business models and group structure can improve bank funding and resilience; examine funding inter-linkages and asset/collateral movements between banking and nonbank financial sectors. *https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12299.pdf* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12299.pdf_