The Dark Side of Bank Wholesale Funding

Abstract

Banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated …nanciers can monitor banks, disciplining bad but re…nancing good ones. This paper models a "dark side" of wholesale funding. In an environment with a costless but noisy public signal on bank project quality, short-term wholesale …nanciers have lower incentives to conduct costly monitoring, and instead may withdraw based on negative public signals, triggering ine¢ cient liquidations. Comparative statics suggest that such distortions of incentives are smaller when public signals are less relevant and project liquidation costs are higher, e.g., when banks hold mostly relationship-based small business loans.

Determinants of Bank Distress in Europe: Evidence from a New Data Set

“…Furthermore, in line with the "concentration-fragility" view (Boyd and De Nicolo 2005), banks located in more concentrated banking sectors are found to be more vulnerable to distress relative to banks located in less concentrated industries. Lastly, we provide evidence supporting the notion of the "dark side" of bank wholesale funding (Huang and Ratnovski 2010).…”

“…Wholesale funding is usually not a part of the traditional deposit protection schemes. This makes wholesale lenders more jittery in the event of financial turbulence, and banks in turn more vulnerable to sudden withdrawals (Huang and Ratnovski 2010). Recent evidence (e.g., in the case of Northern Rock) provides examples of runs by retail depositors preceded by a run by wholesale lenders.…”

Liquidity Crunch in the Interbank Market: Is it Credit or Liquidity Risk, or Both?

“…3 Therefore several recent studies abstract from retail deposits and focus on wholesale money markets. Huang and Ratnovski (2010) extend the Calomiris and Kahn (1991) framework to show that short term wholesale financiers can force an inefficient liquidation of bank assets. The same issue was tackled even before the recent crisis by Rochet and Vives (2004), pointing to the coordination failure among large CD holders.…”

Funding Modes of German Banks: Structural Changes and their Implications

“…Second, given the relative change of funding structures and the simultaneous growth in lending, there is a strategic need for alternative funding modes for retail banks. Relying on demand deposits is clearly not sufficient in the long run, and wholesale funding has its own limitations (e.g., Demirgüç-Kunt and Huizinga 2009;Huang and Ratnovski 2009), as illustrated by the market freeze during the financial crisis of 2007-2009. More flexible rules for bond and commercial paper issuances, as well as asset securitization, might be ways to deal with strategic imbalances between the lending and deposit taking of surplus and deficit banks.…”

“…Alternative explanations for the coexistence of lending and deposit taking are based on information or liquidity synergies (e.g., Black 1975;Fama 1985;Kashyap et al 2002;Mester et al 2007;Norden and Weber 2010). Other recent research examines the role of funding strategies on bank risk and return (e.g., Demirgüç-Kunt and Huizinga 2009;Huang and Ratnovski 2009).…”