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Bank Solvency And Funding Cost
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Book Synopsis Bank Solvency and Funding Cost by : Christoph Aymanns
Download or read book Bank Solvency and Funding Cost written by Christoph Aymanns and published by International Monetary Fund. This book was released on 2016-03-15 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Understanding the interaction between bank solvency and funding cost is a crucial pre-requisite for stress-testing. In this paper we study the sensitivity of bank funding cost to solvency measures while controlling for various other measures of bank fundamentals. The analysis includes two measures of bank funding cost: (a) average funding cost and (b) interbank funding cost as a proxy of wholesale funding cost. The main findings are: (1) Solvency is negatively and significantly related to measures of funding cost, but the effect is small in magnitude. (2) On average, the relationship is stronger for interbank funding cost than for average funding cost. (3) During periods of stress interbank funding cost is more sensitive to solvency than in normal times. Finally, (4) the relationship between funding cost and solvency appears to be non-linear, with higher sensitivity of funding cost at lower levels of solvency.
Book Synopsis Bank Solvency and Funding Cost by : Mr.Stefan W. Schmitz
Download or read book Bank Solvency and Funding Cost written by Mr.Stefan W. Schmitz and published by International Monetary Fund. This book was released on 2017-05-15 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents new evidence on the empirical relationship between bank solvency and funding costs. Building on a newly constructed dataset drawing on supervisory data for 54 large banks from six advanced countries over 2004–2013, we use a simultaneous equation approach to estimate the contemporaneous interaction between solvency and liquidity. Our results show that liquidity and solvency interactions can be more material than suggested by the existing empirical literature. A 100 bps increase in regulatory capital ratios is associated with a decrease of bank funding costs of about 105 bps. A 100 bps increase in funding costs reduces regulatory capital buffers by 32 bps. We also find evidence of non-linear effects between solvency and funding costs. Understanding the impact of solvency on funding costs is particularly relevant for stress testing. Our analysis suggests that neglecting the dynamic features of the solvency-liquidity nexus in the 2014 EU-wide stress test could have led to a significant underestimation of the impact of stress on bank capital ratios.
Book Synopsis Bank Solvency and Funding Cost by : Christoph Aymanns
Download or read book Bank Solvency and Funding Cost written by Christoph Aymanns and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Bank Funding Costs for International Banks by : MissRita Babihuga
Download or read book Bank Funding Costs for International Banks written by MissRita Babihuga and published by International Monetary Fund. This book was released on 2014-04-30 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the determinants of bank funding costs for a sample of internationally active banks from 2001–12. We find that changes in banks’ unsecured funding costs are associated with bank-specific characteristics such as an institution’s credit worthiness and the return on its market value, and importantly, on the level and quality of capital. Similarly, market factors such as the level of investor risk appetite, as well as shocks to financial markets—notably the US subprime crisis and the Euro Area sovereign debt crisis—have also been key drivers of the sharp rise in bank funding costs. We also find evidence that large systemically important institutions have enjoyed a funding advantage, and that this advantage has risen since the onset of the two crises. With the exception of Euro Area periphery banks, by end-2012 the rise in funding costs had generally been reversed for most major banks as a result of improvments in bank asset quality as well as steps taken to increase resilience, notably higher capitalization. Our results suggest increased capital buffers may potentially support bank lending to the real economy by reducing bank funding costs.
Book Synopsis Bank Funding Costs and Solvency by : Guillaume Arnould
Download or read book Bank Funding Costs and Solvency written by Guillaume Arnould and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Solvency and Wholesale Funding Cost Interactions at UK Banks by : Kieran Dent
Download or read book Solvency and Wholesale Funding Cost Interactions at UK Banks written by Kieran Dent and published by . This book was released on 2017 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the interaction between solvency and funding costs at UK banks. We use the market-based leverage ratio as a proxy for market participants' perceptions of bank solvency. We investigate the impact that changes in this ratio have on banks' CDS premia, which are a proxy for their marginal cost of wholesale funding. We find that a negative shock to market participants' perception of banks' solvency leads to an increase in banks' marginal cost of wholesale funding. We find evidence that this negative relationship is nonlinear, i.e. the responsiveness of funding costs to a shock to solvency is greater at lower initial levels of solvency.
Book Synopsis Bank Solvency Risk and Funding Cost Interactions in a Small Open Economy by : Iñaki Aldasoro
Download or read book Bank Solvency Risk and Funding Cost Interactions in a Small Open Economy written by Iñaki Aldasoro and published by . This book was released on 2018 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Using proprietary balance sheet data for Korean banks and a simultaneous equation model, the authors document that increased marginal funding costs lead to larger solvency risk (as measured by the Tier 1 regulatory capital ratio), which, in turn, leads to larger marginal funding costs. A 100 bp increase in marginal funding costs (solvency risk) is associated with a 155 (77) bp increase in solvency risk (marginal funding costs). The findings of an economically and statistically significant relationship are robust to considering different proxies for solvency risk, types of banks, interest rate regimes, and interest margin management strategies. They also hold irrespective of the funding profile considered. FX-related macroprudential policies can affect the negative feedback loop by muting the effect of marginal funding costs on solvency risk. Their findings can inform the calibration of macroprudential stress tests."--Abstract.
Book Synopsis Rules of Thumb for Bank Solvency Stress Testing by : Mr.Daniel C. Hardy
Download or read book Rules of Thumb for Bank Solvency Stress Testing written by Mr.Daniel C. Hardy and published by International Monetary Fund. This book was released on 2013-11-11 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: Rules of thumb can be useful in undertaking quick, robust, and readily interpretable bank stress tests. Such rules of thumb are proposed for the behavior of banks’ capital ratios and key drivers thereof—primarily credit losses, income, credit growth, and risk weights—in advanced and emerging economies, under more or less severe stress conditions. The proposed rules imply disproportionate responses to large shocks, and can be used to quantify the cyclical behaviour of capital ratios under various regulatory approaches.
Book Synopsis Bank Capital and the Cost of Equity by : Mohamed Belkhir
Download or read book Bank Capital and the Cost of Equity written by Mohamed Belkhir and published by International Monetary Fund. This book was released on 2019-12-04 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs.
Book Synopsis Solvency and Regulation of Banks by : Jack Revell
Download or read book Solvency and Regulation of Banks written by Jack Revell and published by . This book was released on 1975 with total page 168 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Benefits and Costs of Bank Capital by : Jihad Dagher
Download or read book Benefits and Costs of Bank Capital written by Jihad Dagher and published by International Monetary Fund. This book was released on 2016-03-03 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: The appropriate level of bank capital and, more generally, a bank’s capacity to absorb losses, has been at the core of the post-crisis policy debate. This paper contributes to the debate by focusing on how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations of banks in past banking crises. The paper also looks at the welfare costs of tighter capital regulation by reviewing the evidence on its potential impact on bank credit and lending rates. Its findings broadly support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks.
Book Synopsis Measuring Systemic Liquidity Risk and the Cost of Liquidity Insurance by : Tiago Severo
Download or read book Measuring Systemic Liquidity Risk and the Cost of Liquidity Insurance written by Tiago Severo and published by International Monetary Fund. This book was released on 2012-07-01 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost.
Book Synopsis Sovereign Risk and Bank Risk-Taking by : Mr.Anil Ari
Download or read book Sovereign Risk and Bank Risk-Taking written by Mr.Anil Ari and published by International Monetary Fund. This book was released on 2017-12-14 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
Book Synopsis Accounting discretion of banks during a financial crisis by : Mr.Luc Laeven
Download or read book Accounting discretion of banks during a financial crisis written by Mr.Luc Laeven and published by International Monetary Fund. This book was released on 2009-09-01 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.
Book Synopsis Bank Funding, Liquidity, and Capital Adequacy by : José Gabilondo
Download or read book Bank Funding, Liquidity, and Capital Adequacy written by José Gabilondo and published by Edward Elgar Publishing. This book was released on 2016-09-28 with total page 170 pages. Available in PDF, EPUB and Kindle. Book excerpt: Focusing primarily on the banking system in the United States, this book offers an innovative framework that integrates a depository bank’s liquidity and its capital adequacy into a unified notion of funding that helps to explain how the 2007–2008 crisis unfolded, why central banks succeeded in resolving the crisis, and how the conceptual legacy of the crisis and its resolution led to lasting changes in bank funding regulation, including new objective requirements for bank liquidity. To provide a comparative context, the book also examines the funding models of non-bank intermediaries like dealer banks and insurers.
Book Synopsis Estimating the Costs of Financial Regulation by : Mr.Andre Santos
Download or read book Estimating the Costs of Financial Regulation written by Mr.Andre Santos and published by International Monetary Fund. This book was released on 2012-09-11 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
Book Synopsis Bank Debt in Europe by : Mrs.Vanessa Le Lesle
Download or read book Bank Debt in Europe written by Mrs.Vanessa Le Lesle and published by International Monetary Fund. This book was released on 2012-12-20 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: The crisis in Europe has underscored the vulnerability of European bank funding models compared to international peers. This paper studies the drivers behind this fragility and examines the future of bank funding, primarily wholesale, in Europe. We argue that cyclical and structural factors have altered the structure, cost, and composition of funding for European banks. The paper discusses the consequences of shifting funding patterns and investor preferences and presents possible policy options and bank actions to enhance European bank funding models’ robustness.
