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The Dark Side of Bank Wholesale Funding

Author/Editor: Lev Ratnovski | Rocco Huang
Authorized for Distribution: July 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,013KB)
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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.
 
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Series: Working Paper No. 10/170
Subject(s): Banks | External financing | Economic models
 
English  
    Published:   July 1, 2010        
    ISBN/ISSN:   9781455201815   Format:   Paper
    Stock No:   WPIEA2010170   Pages:   64
    Price:   US$18.00
       
     
Please address any questions about this title to publications@imf.org.