The Dark Side of Bank Wholesale Funding

July 1, 2010

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Format: Chicago

Lev Ratnovski, and Rocco Huang. The Dark Side of Bank Wholesale Funding, (USA: International Monetary Fund, 2010) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad but refinancing 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 financiers have lower incentives to conduct costly monitoring, and instead may withdraw based on negative public signals, triggering inefficient 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.

Subject: Bank deposits, Bank liquidation, Banking, Tax incentives

Keywords: Interest rate, Monetary value, Wholesale financier, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/170
Stock No:

WPIEA2010170
ISBN:

9781455201815
ISSN:

1018-5941

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