Bank Funding Costs and Solvency

39 Pages Posted: 9 Jan 2020

See all articles by Cosimo Pancaro

Cosimo Pancaro

European Central Bank (ECB)

Dawid Żochowski

European Central Bank

Guillaume Arnould

Bank of England; Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)

Date Written: January, 2020

Abstract

This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks' asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers.

Keywords: banks, funding costs, solvency

JEL Classification: G15, G21

Suggested Citation

Pancaro, Cosimo and Żochowski, Dawid and Arnould, Guillaume, Bank Funding Costs and Solvency (January, 2020). ECB Working Paper No. 2356. Available at SSRN: https://ssrn.com/abstract=3516058

Cosimo Pancaro (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Dawid Żochowski

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

Guillaume Arnould

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

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