{
  "title": "The Dark Side of Bank Wholesale Funding",
  "publication": "IMF Working Papers, July 1, 2010",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061",
  "overlayPath": "/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/index.md",
  "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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Banks increasingly use short-term wholesale funds to supplement traditional retail deposits.\n- Existing literature mainly emphasizes the \"bright side\" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad but refinancing good ones.\n- 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."
    },
    {
      "heading": "Main findings",
      "content": "- Short-term wholesale financiers’ incentives to monitor are reduced when a public signal—costless but noisy—on bank project quality exists.\n- Withdrawals based on negative public signals can trigger inefficient liquidations, even when refinancing would be socially valuable.\n- The model contrasts the monitoring/refinancing role of sophisticated financiers (the \"bright side\") with strategic withdrawal behavior (the \"dark side\")."
    },
    {
      "heading": "Comparative statics and contextual drivers",
      "content": "- Distortions of incentives are smaller when:\n  - public signals are less relevant, and\n  - project liquidation costs are higher.\n- An example context where distortions are smaller: banks holding mostly relationship-based small business loans (higher liquidation costs)."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Reliance on short-term wholesale funding can introduce systemic fragility when public signals are noisy and financiers under-monitor.\n- Mitigating the \"dark side\" may involve:\n  - reducing the relative importance of noisy public signals in financiers’ decision-making, and\n  - recognizing that higher liquidation costs (e.g., relationship lending) can dampen harmful run-like behavior."
    },
    {
      "heading": "Authors and publication date",
      "content": "- By Lev Ratnovski, Rocco Huang\n- July 1, 2010\n\nSource: The Dark Side of Bank Wholesale Funding, IMF Working Paper by Lev Ratnovski and Rocco Huang, July 1, 2010.\n\n---\n\n Content in this bundle\n\n- wp10170\n  - wp10170 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp10170 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/bundle-manifest.json)",
    "Authors: Lev Ratnovski, Rocco Huang",
    "Published: July 1, 2010",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455201815.001",
    "Banks increasingly use short-term wholesale funds to supplement traditional retail deposits.",
    "Existing literature mainly emphasizes 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.",
    "Short-term wholesale financiers’ incentives to monitor are reduced when a public signal—costless but noisy—on bank project quality exists.",
    "Withdrawals based on negative public signals can trigger inefficient liquidations, even when refinancing would be socially valuable.",
    "The model contrasts the monitoring/refinancing role of sophisticated financiers (the \"bright side\") with strategic withdrawal behavior (the \"dark side\").",
    "Distortions of incentives are smaller when:",
    "An example context where distortions are smaller: banks holding mostly relationship-based small business loans (higher liquidation costs).",
    "Reliance on short-term wholesale funding can introduce systemic fragility when public signals are noisy and financiers under-monitor.",
    "Mitigating the \"dark side\" may involve:",
    "By Lev Ratnovski, Rocco Huang",
    "July 1, 2010",
    "**_wp10170**"
  ],
  "related": [
    {
      "title": "_wp10170",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10170.pdf",
      "summary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10170.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10170.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/index.md",
    "json": "/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/31/the-dark-side-of-bank-wholesale-funding-24061/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-18T07:03:33.270Z"
}