Fragile wholesale deposits, liquidity risk, and banks' maturity transformation

Carola Müller, Matias Ossandon Busch, Miguel Sarmiento and Freddy Pinzon-Puerto

No 1263, BIS Working Papers from Bank for International Settlements

Abstract: We investigate the impact of large-scale investment fund redemptions on bank lending. Using detailed data on the link between commercial banks and investment funds in an emerging economy, we document that redemptions lead to a decrease in the demand for certificates of deposit and increasing volatility in this wholesale funding market. We find that banks subject to the fund-induced fragility in their funding markets adjust credit terms: while credit volumes remain stable, terms of credit deteriorate. Affected banks raise interest rates and reduce the maturity of newly issued loans. These findings showcase that wholesale deposit runs affect banks' incentives to engage in maturity transformation.

Keywords: uninsured deposits; wholesale funding; liquidity risk; credit supply; non-bank financial intermediaries (search for similar items in EconPapers)
JEL-codes: E44 E58 G01 G21 G23 (search for similar items in EconPapers)
Date: 2025-04
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