Bank Solvency and Funding Cost: New Data and New Results

47 Pages Posted: 2 Jun 2017

See all articles by Stefan W. Schmitz

Stefan W. Schmitz

Oesterreichische Nationalbank (OeNB); Vienna Circle Society

Michael Sigmund

Oesterreichische Nationalbank (OeNB)

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department

Multiple version iconThere are 2 versions of this paper

Date Written: May 2017

Abstract

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.

Keywords: Solvency, funding cost, stress testing, General

JEL Classification: G20, G30

Suggested Citation

Schmitz, Stefan W. and Sigmund, Michael and Valderrama, Laura, Bank Solvency and Funding Cost: New Data and New Results (May 2017). IMF Working Paper No. 17/116. Available at SSRN: https://ssrn.com/abstract=2978677

Stefan W. Schmitz (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner Platz 3
POB 61
Vienna 1011
Austria

Vienna Circle Society ( email )

Spitalgasse 2-4, Court 1
Vienna, 1090
Austria

Michael Sigmund

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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