BoE: solvency and wholesale funding cost interactions at UK banks

In a staff working paper, Bank of England researchers study the interaction between solvency and funding costs at UK banks. They use the market-based leverage ratio as a proxy for market participants’ perceptions of bank solvency, and investigate the impact that changes in this ratio have on banks’ CDS premia, which are a proxy for their marginal cost of wholesale funding.

Findings are that a negative shock to market participants’ perception of bank’s solvency leads to an increase in banks’ marginal cost of wholesale funding, and that this negative relationship is nonlinear, ie the responsiveness of funding costs to a shock to solvency is greater at lower initial levels of solvency.

Read the full paper

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