Bank Solvency and Funding Cost: New Data and New Results
IMF Working Papers, May 15, 2017
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- Bank Solvency and Funding Cost: New Data and New Results
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Bibliographic details
- Authors: Stefan W. Schmitz, Michael Sigmund, Laura Valderrama
- Published: May 15, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484300664.001
Overview and Data
- Paper presents new evidence on the empirical relationship between bank solvency and funding costs.
- Dataset: supervisory data for 54 large banks from six advanced countries over 2004–2013.
- Method: simultaneous equation approach to estimate the contemporaneous interaction between solvency and liquidity.
Key Findings
- 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.
- Evidence of non-linear effects between solvency and funding costs.
- Liquidity and solvency interactions can be more material than suggested by the existing empirical literature.
- Understanding the impact of solvency on funding costs is particularly relevant for stress testing.
- The 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.
Policy-Relevant Implications
- Stress-testing frameworks should incorporate the contemporaneous and potentially non-linear interactions between solvency and funding costs.
- Regulatory assessments of capital adequacy should account for feedback effects from funding cost increases to regulatory capital buffers.
- Supervisory data and simultaneous-equation estimation techniques can provide more accurate measures of the solvency‑liquidity nexus for macroprudential surveillance.
Content in this bundle
- Bank Solvency and Funding Cost: New Data and New Results, WP/17/116, May 2017