The Golden Rule of Banking: Funding Cost Risks of Bank Business Models

42 Pages Posted: 15 Dec 2017

See all articles by David Großmann

David Großmann

Andrassy University Budapest, Students; HSBA Hamburg School of Business Administration, Students

Peter Scholz

Hamburg School of Business Administration

Date Written: December 12, 2017

Abstract

The liquidity regulation of banks in Pillar 1 of the Basel framework does not consider funding cost risks of different bank business models. Therefore, we assemble a data set of balance sheet positions including maturities and use the method of Value-Liquidity-at-Risk to explore 118 European retail, wholesale, and trading banks. When examining liquidity-induced equity risks, triggered by exemplary rating shifts, we find that retail banks bear significantly lower funding cost risks than wholesale and trading banks. Consequently, a prudential regulation, which simultaneously considers the funding cost risk and the diversification of the banking system is recommended.

Keywords: Bank Business Models, Funding Cost Risk, Liquidity Requirements, Value-Liquidity-at-Risk, Value Liquidity Expected Shortfall

JEL Classification: G21, G28

Suggested Citation

Großmann, David and Scholz, Peter, The Golden Rule of Banking: Funding Cost Risks of Bank Business Models (December 12, 2017). Available at SSRN: https://ssrn.com/abstract=3086828 or http://dx.doi.org/10.2139/ssrn.3086828

David Großmann (Contact Author)

Andrassy University Budapest, Students ( email )

Hungary

HSBA Hamburg School of Business Administration, Students ( email )

Germany

Peter Scholz

Hamburg School of Business Administration ( email )

Adolphsplatz 1
Hamburg, 20457
Germany

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