This lesson examines the bank’s sources of funding and its ability to meet its liquidity needs .

7.1 Funding Sources
Banks have a range of funding sources:

  • Customer Deposits: The most stable and cost-effective source of funding .

  • Short-Term Wholesale Funding: Commercial paper, repurchase agreements (repos), and interbank borrowing .

  • Long-Term Wholesale Funding: Bonds and subordinated debt.

  • Shareholders’ Equity: The most stable, but most expensive, source of funding.

7.2 Funding Stability
Analysts assess the stability of a bank’s funding base. A stable funding base reduces liquidity risk . The key questions are:

  • Is the deposit base stable, or is it subject to withdrawal?

  • How dependent is the bank on short-term wholesale funding?

  • Are there contingency funding plans in place?

7.3 Liquidity Risk
Liquidity risk is the risk that the bank cannot meet its obligations when they fall due . Key liquidity metrics include:

  • Liquidity Coverage Ratio (LCR): A short-term liquidity metric .

  • Net Stable Funding Ratio (NSFR): A long-term stability metric .

  • Loan-to-Deposit Ratio: A measure of funding reliance .

7.4 Contingency Funding
Banks must have contingency funding plans to address potential liquidity crises .

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