Bank funding costs and solvency

Guillaume Arnould, Cosimo Pancaro and Dawid Żochowski

No 853, Bank of England working papers from Bank of England

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; solvency; funding costs (search for similar items in EconPapers)
JEL-codes: G15 G21 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2020-02-07
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Bank funding costs and solvency (2022)
Working Paper: Bank funding costs and solvency (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0853

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