The Effect of Monetary Policy on Bank Wholesale Funding

Abstract

We study how monetary policy affects the funding composition of the banking sector. When monetary tightening reduces the supply of retail deposits, banks attempt to substitute wholesale funding for deposit outflows to smooth their lending. Because of financial frictions, banks have varying degrees of access to wholesale funding. Therefore, large banks, or those with greater reliance on wholesale funding, increase their wholesale funding more. Consequently, monetary tightening increases both the reliance on and the concentration of wholesale funding within the banking sector. Our findings also suggest that liquidity requirements could bolster monetary policy transmission through the bank lending channel. This paper was accepted by Tyler Shumway, finance.

Real Interest Rates, Bank Borrowing, and Fragility

“…Regarding Prediction 1(ii), Choi and Choi (2021) document how, following a monetary policy tightening, U.S. banks substitute low-interest retail deposits with high-interest wholesale deposits. But, as the substitution is not perfect, there is an overall reduction of bank borrowing, which translates into a reduction of bank lending.…”

The Banking View of Bond Risk Premia

“…We next examine whether balance sheet aggregates focusing on liquidity risk predict bond returns. We consider the liquidity mismatch index (LMI) of Bai, Krishnamurthy, and Weymuller (2018), the bank liquidity creation index of Berger and Bouwman (2009), which we equal-weight or value-weight by total gross assets across banks (BB), and the Basel Committee's liquidity coverage ratio (LCR) as constructed by Choi and Choi (2016). 29 The measures of liquidity risk behave differently from banks' average income gap.…”

A Note on Money Creation in Emerging Market Economies

“…In such cases, the share of deposits in total wealth remains stable, but the loans-to-deposits ratio is also unaffected. Choi and Choi (2016), on the other hand, argue that monetary tightening reduces deposit supply and leads to banks' greater reliance on wholesale funding. They reasonably point out that deposits will contract due to less money creation by banks (i.e.…”