SUMMARY

Funding structures matter for financial stability. In particular, overreliance by some banks on certain types of wholesale funding—especially by U.S. and European banks—contributed to the global financial crisis. Most banks have recently made their funding structures more resilient by raising their capital adequacy ratios and reducing their dependence on short-term wholesale funding. However, some distressed banks remain vulnerable because their equity capital levels are inadequate and they are highly dependent on central bank funds. This chapter examines how bank funding structures have changed over time—especially in the run-up to the crisis—and how these structures affect financial stability. The analysis considers banks in a number of advanced and emerging market economies and includes systemically important banks. The analysis shows that healthy banks rely more on equity and less on debt (especially short-term debt) and have more diversified funding structures with lower loan-to-deposit ratios. Adequate capital buffers reduce a bank’s probability of default and support financial stability. Therefore, Basel III capital regulations that aim to raise the quantity and quality of capital should con-tinue to be a mainstay of the reform efforts. Basel III liquidity regulations will also play a role by reducing banks’ overreliance on short-term wholesale funding, which has proven detrimental to financial stability. Current reform efforts are aimed at reducing financial instability, but there can be tension among some key regulatory reforms that affect bank funding structures. As this chapter shows, such tension can arise, on the one hand, from pressures to use more secured funding (thereby raising levels of asset encumbrance) as well as deposits and, on the other hand, from bank-resolution initiatives (including the introduction of bail-in powers and th