The dark side of bank wholesale funding

Abstract

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Volatile Lending and Bank Wholesale Funding

“…To start with, this is the first empirical study that examines the relation between bank loan volume volatility and bank liabilities. To this end it contributes to the debate on the negative externalities of wholesale funding (Ratnovski and Huang 2011, Ivashina and Scharfstein 2010, Segura and Suarez 2012, Brunnermeier and Oehmke 2013 by providing richer evidence on the link between wholesale liabilities and lending. Also, our results add asset volatility to the battery of proposed liability structure determinants, which so far includes liquidity provision (Berger andBowman 2009, Diamond andRajan 2012); stable funding for information-opaque assets (Song and Thakor 2008); bank market power (Berlin and Mester 1998;Craig and Dinger, 2010) and market entry barriers (Park and Pennacchi 2009;Dinger and von Hagen 2009); taxes (Pennacchi et al 2010); a shift to a new originate-and-distribute business model (Gorton and Metrick 2011); as well as the fact that in periods of lending booms the growth rate of deposits is insufficient to cover loan demand needs as alternative determinants.…”

“…These pressures give rise to negative externalities with adverse effects for the financial system as a whole. Such externalities include higher volatility of bank asset volumes and an amplification of macroeconomic shocks (see Ratnovski and Huang 2011, Ivashina and Scharfstein 2010, Segura and Suarez 2012, Brunnermeier and Oehmke 2013.…”

“…However, one important exception to wholesale volume flexibility exists: a bank can lose control over the volume of wholesale funding it is able to attract (or hold on its balance sheet) in situations when either the bank or the banking system as a whole is in distress. The recent literature (Huang andRatnovski 2011, Segura andSuarez 2012) has focused almost exclusively on such situations when banks lose access to wholesale funding so that from the point of view of the bank short-term wholesale funding becomes inflexible. We argue here that this exclusive focus on the rare events of substantial wholesale market distress omits the potentially important advantages of wholesale funding in normal times as well as the risks of "overinvesting" in inflexible retail funding.…”

Bank Cash Holdings and Investor Uncertainty

“…In certain cases, greater opacity prevented liability holders from assessing the financial health of their counterparties. Fear of insolvency, rather than looming insolvency, was enough to create significant liquidity issues for certain banks (Huang and Ratnovski, 2011). The problem was particularly acute in wholesale funding markets, although a number of banks also experienced runs on deposits.…”

Monitoring Matters: Debt Seniority, Market Discipline and Bank Conduct

“…This debate is relevant because bank funding models, not only in Europe, have been criticized for their vulnerability in the academic literature and by policy makers in the aftermath of the crisis (Demirgüç-Kunt and Huizinga (2010); Huang and Ratnovski (2011);Le Lesle (2012)). Importantly, regulating bank capital and developing rules that focus specifically on banks' liability composition have received a massive overhaul in the past few years.…”