Bank Funding Costs During the COVID-19 Pandemic: Evidence from China

This paper investigates whether and how the COVID-19 pandemic affects bank funding costs in China. We find a significantly positive relationship between the offering yields of negotiable certificates of deposit and banks’ pandemic exposure. The surge in bank funding costs is alleviated by banks’ asset quality, financial flexibility, operational resilience, and government bailouts, indicating that pandemic-induced risks are priced in the interbank market. The alternative explanations of monetary policy intervention, investors’ flight-to-liquidity effect, bank liquidity hoarding, and banks’ mispricing are further excluded. We contribute to the literature on the pandemic effects on financial markets, and bank funding during crises.