The Golden Rule of Banking: Funding Cost Risks of Bank Business Models

 

Together with my Ph.D. student David, we have analyzed liquidity risks and therefore finished the third article for his thesis.

Abstract

The liquidity regulation of banks in Pillar 1 of the Basel framework does not consider 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.

Citation

David Großmann & Peter Scholz (2017): The Golden Rule of Banking: Funding Cost Risks of Bank Business Models. SSRN Working Paper.

Bank Regulation — One Size Does Not Fit All

Abstract

Bank business models show diverse risk characteristics, but these differences are not sufficiently considered in Pillar 1 of the regulatory framework. Even if the business model is analyzed within the European SREP, global Pillar 2 approaches differ and could lead to competitive disadvantages. Using the framework of Miles et al. (2012), we examine a dataset of 115 European banks which is split into retail, wholesale, and trading banks. We show that shifts in funding structure affect business models differently. Consequently, a “one size” approach in Pillar 1 for the regulation of banks does not fit all.

Citation

David Großmann & Peter Scholz (2017): Bank Regulation — One Size Does Not Fit All. Journal of Applied Finance & Banking (7)5, 1-27.

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Bank Regulation: One Size Does Not Fit All

Zusammen mit David Großmann, meinem Doktoranden der Kooperation zwischen der Andrássy Universität (Budapest) und der HSBA, arbeite ich an einem Paper zum Thema Bankregulierung. David hat diese Arbeit bereits auf der EURO2015 in Glasgow vorgestellt und von mir auf der World Finance Conference 2016 in New York.

Update 18. Februar 2017: Das Paper wurde bei einem peer-reviewed Journal zur Begutachtung eingereicht.

Abstract

Bank business models show diverse risk characteristics, but these differences are not sufficiently considered in Pillar 1 of the regulatory framework. Even if the business model is analyzed within the European SREP, global Pillar 2 approaches differ and could lead to competitive disadvantages. Using the framework of Miles et al. (2012), we examine a dataset of 115 European banks which is split into retail, wholesale, and trading banks. We show that shifts in funding structure affect business models differently. Consequently, a “one size” approach in Pillar 1 for the regulation of banks does not fit all.