The golden rule of banking: funding cost risks of bank business models

David Grossmann () and Peter Scholz
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David Grossmann: Andrássy University Budapest
Peter Scholz: HSBA Hamburg School of Business Administration

Journal of Banking Regulation, 2019, vol. 20, issue 2, No 5, 174-196

Abstract: Abstract The liquidity regulation of banks in Pillar 1 of the Basel framework does not consider longer-term funding cost risks of different bank business models. Therefore, we assemble a data set of balance sheet positions including maturities and use the method of Value-Liquidity-at-Risk to explore 118 European retail, wholesale, and trading banks. When examining liquidity-induced equity risks, trigged by exemplary rating shifts, we find that retail banks bear significantly lower funding cost risks than wholesale and trading banks. Consequently, a prudential regulation, which simultaneously considers the funding cost risk and the diversification of the banking system, is recommended.

Keywords: Bank business models; Funding cost risk; Liquidity requirements; Value-Liquidity-at-Risk; Value Liquidity Expected Shortfall (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/s41261-018-0080-5

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