Volatile Lending and Bank Wholesale Funding

Ben Craig and Valeriya Dinger

No 1417, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: The paper presents the first empirical study of the relation between bank loan volume volatility and bank retail and wholesale liabilities. We argue that since the volume of retail deposits is inflexible, banks facing volatile loan demand tend to fund loans with larger shares of wholesale rather than retail liabilities. We empirically confirm this argument using a unique dataset constructed from the weekly financial reports of 104 large U.S. commercial banks. The high frequency of the data allows us to employ dynamic identification schemes which mitigate reverse causality and selection concerns. Our results imply that the introduction of regulatory limits on wholesale liabilities will increase the exposure of banks to loan demand shocks. Such a regulation will also inhibit the ability of the banking sector to service more volatile loans. This may smooth the lending cycles, but it will also slow recoveries of lending volume after a substantial recession.

Keywords: wholesale funding; retail deposits; loan volume volatility (search for similar items in EconPapers)
JEL-codes: E44 G21 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-10-02
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1417

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DOI: 10.26509/frbc-wp-201417

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