A Review of Bank Funding Cost Differentials

The debate over the existence and extent of funding cost differentials between large and small banks is central to regulatory reforms related to perceptions of “too big to fail” government support. After providing a simple taxonomy of five basic approaches into which the wide-ranging empirical liter...

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Bibliographic Details
Published in:Journal of financial services research 2016-06, Vol.49 (2-3), p.151-174
Main Author: Kroszner, Randall
Format: Article
Language:English
Subjects:
Banking industry
Banks
Credit default swaps
Credit ratings
Deposit insurance
Economics and Finance
Finance
Financial Services
Funding
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Perceptions
Ratings & rankings
Regulation of financial institutions
Regulatory reform
Risk
Size of enterprise
Studies
Taxonomy
Citations: Items that this one cites
Items that cite this one
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Summary:The debate over the existence and extent of funding cost differentials between large and small banks is central to regulatory reforms related to perceptions of “too big to fail” government support. After providing a simple taxonomy of five basic approaches into which the wide-ranging empirical literature on this topic can be categorized, I analyze key challenges that all of the approaches face, namely, the interpretation of funding costs differences between large and small banks, the choice of the relevant time period, the choice of the sample, and the significant differences in the funding structures of large and small banks. After analyzing further more specific challenges for three of the approaches, I describe the most promising methods for measuring funding cost differentials and present a “natural experiment” concerning the elimination of complete FDIC coverage of transactions deposits at the end of 2012, which suggests that depositors did not perceived a significant difference in risk between large and small banks during this period.
ISSN:0920-8550
1573-0735
DOI:10.1007/s10693-016-0247-0