A New Indicator of Bank Funding Cost

42 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

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Date Written: April 9, 2020

Abstract

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 call the 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 market participants' expectations of 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, multi- curve 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 9, 2020). Swiss Finance Institute Research Paper No. 20-20, Available at SSRN: https://ssrn.com/abstract=3575715 or http://dx.doi.org/10.2139/ssrn.3575715

Eric Jondeau (Contact Author)

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

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

Benoît Mojon

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Jean-Guillaume Sahuc

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42 92-49-52 (Phone)
+33 1 42-92-62-92 (Fax)

HOME PAGE: http:// https://sites.google.com/site/sahuceconomics/

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

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