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Journal of Banking Regulation

, Volume 20, Issue 2, pp 174–196 | Cite as

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

  • David GrossmannEmail author
  • Peter Scholz
Original Article
  • 26 Downloads

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 

JEL Classification

G21 G28 

Notes

Acknowledgements

We are grateful to Klaus Beckmann, Robert Fiedler, Lars Grosstueck, Sven Klinner, Jan-Hendrik Meier, Stefan Okruch, Stefan Prigge, Christian Schaeffler, Stefan Schoenherr, Aline Taenzer, Christoph Weldam, and participants of the Claussen-Simon Graduate Centre at HSBA for helpful comments and discussions. We would particularly like to thank the University of Applied Sciences Kiel for the cooperation and the provided market data. The paper benefited from the comments and remarks of two anonymous referees. We also like to thank Goetz Greve, the Claussen-Simon Foundation, and the Association of Friends and Sponsors of the HSBA.

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Copyright information

© Springer Nature Limited 2018

Authors and Affiliations

  1. 1.Andrássy University BudapestBudapestHungary
  2. 2.Claussen-Simon Graduate Centre at HSBAHamburgGermany
  3. 3.HSBA Hamburg School of Business AdministrationHamburgGermany

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