{
  "title": "Bank Solvency and Funding Cost: New Data and New Results",
  "publication": "IMF Working Papers, May 15, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/05/15/bank-solvency-and-funding-cost-new-data-and-new-results-44914",
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  "summary": "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 contempor",
  "sections": [
    {
      "heading": "Overview and Data",
      "content": "- Paper presents new evidence on the empirical relationship between bank solvency and funding costs.\n- Dataset: supervisory data for 54 large banks from six advanced countries over 2004–2013.\n- Method: simultaneous equation approach to estimate the contemporaneous interaction between solvency and liquidity."
    },
    {
      "heading": "Key Findings",
      "content": "- A 100 bps increase in regulatory capital ratios is associated with a decrease of bank funding costs of about 105 bps.\n- A 100 bps increase in funding costs reduces regulatory capital buffers by 32 bps.\n- Evidence of non-linear effects between solvency and funding costs.\n- Liquidity and solvency interactions can be more material than suggested by the existing empirical literature.\n- Understanding the impact of solvency on funding costs is particularly relevant for stress testing.\n- 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."
    },
    {
      "heading": "Policy-Relevant Implications",
      "content": "- Stress-testing frameworks should incorporate the contemporaneous and potentially non-linear interactions between solvency and funding costs.\n- Regulatory assessments of capital adequacy should account for feedback effects from funding cost increases to regulatory capital buffers.\n- Supervisory data and simultaneous-equation estimation techniques can provide more accurate measures of the solvency‑liquidity nexus for macroprudential surveillance.\n\n---\n\n Content in this bundle\n\n- Bank Solvency and Funding Cost: New Data and New Results, WP/17/116, May 2017\n  - Bank Solvency and Funding Cost: New Data and New Results, WP/17/116, May 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Bank Solvency and Funding Cost: New Data and New Results, WP/17/116, May 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/05/15/bank-solvency-and-funding-cost-new-data-and-new-results-44914"
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    "Authors: Stefan W. Schmitz, Michael Sigmund, Laura Valderrama",
    "Published: May 15, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484300664.001",
    "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.",
    "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.",
    "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.",
    "**Bank Solvency and Funding Cost: New Data and New Results, WP/17/116, May 2017**"
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