Bank Solvency and Funding Cost

Author/Editor:

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

Publication Date:

March 15, 2016

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 16/64

Subject:

English

Publication Date:

March 15, 2016

ISBN/ISSN:

9781513591131/1018-5941

Stock No:

WPIEA2016064

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

30

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