A New Indicator of Bank Funding Cost

43 Pages Posted: 15 Apr 2020

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Benoît Mojon

Bank for International Settlements (BIS)

Jean-Guillaume Sahuc

Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX

Multiple version iconThere are 3 versions of this paper

Date Written: April 6, 2020


The cost of bank funding on money markets is typically the sum of a risk-free rate and a spread that reflects rollover risk, i.e., the risk that banks cannot roll over their short-term market funding. This risk is a major concern for policymakers, who need to intervene to prevent the funding liquidity freeze from triggering the bankruptcy of solvent financial institutions. We construct a new indicator of rollover risk for banks, which we have called forward funding spread. It is calculated as the difference between the three-month forward rate of the yield curve constructed using only instruments with a three-month tenor and the corresponding forward rate of the default-free overnight interest swap yield curve. The forward funding spread usefully complements its spot equivalent, the IBOR-OIS spread, in the monitoring of bank funding risk in real time. First, it accounts for the market participants' expectations for how funding costs will evolve over time. Second, it identifies liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks. Third, it has much higher predictive power for economic growth and bank lending in the United States and the euro area than the spot IBOR-OIS, credit default swap spreads or bank bond credit spreads.

Keywords: bank funding risk, bank credit spreads, liquidity supply regimes, multicurve environment, economic activity predictability

JEL Classification: E32, E44, E52

Suggested Citation

Jondeau, Eric and Mojon, Benoît and Sahuc, Jean-Guillaume, A New Indicator of Bank Funding Cost (April 6, 2020). BIS Working Paper No. 854, Available at SSRN: https://ssrn.com/abstract=3571434

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

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Benoît Mojon

Bank for International Settlements (BIS) ( email )

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Jean-Guillaume Sahuc

Banque de France ( email )

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