Bank Funding Costs and Capital Structure

45 Pages Posted: 30 Jun 2019

Date Written: June 21, 2019

Abstract

If bail-in is credible, risk premia on bank securities should decrease as funding sources junior to and alongside them in the creditor hierarchy increase. Other things equal, we find that when banks have more equity and less subordinated debt they have lower risk premia on both. When banks have more subordinated and less senior unsecured debt, senior unsecured risk premia are lower. For percentage point changes to an average balance sheet, these reductions would offset about two thirds of the higher cost of equity relative to subordinated debt and one third of the spread between subordinated and senior unsecured debt.

Keywords: Funding costs, weighted average cost of capital, capital structure, creditor hierarchy, loss-absorbing capacity, Modigliani–Miller offset, contingent claims analysis

JEL Classification: G21, G32

Suggested Citation

Gimber, Andrew and Rajan, Aniruddha, Bank Funding Costs and Capital Structure (June 21, 2019). Bank of England Working Paper No. 805, Available at SSRN: https://ssrn.com/abstract=3411687 or http://dx.doi.org/10.2139/ssrn.3411687

Andrew Gimber (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/andrew-gimber

Aniruddha Rajan

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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