Bank funding costs and solvency
Dawid Żochowski and
Guillaume Arnould ()
No 2356, Working Paper Series from European Central Bank
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. JEL Classification: G15, G21
Keywords: banks; funding costs; solvency (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
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Working Paper: Bank funding costs and solvency (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202356
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