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The dark side of bank wholesale funding

Rocco Huang and Lev Ratnovski ()

No 1223, Working Paper Series from European Central Bank

Abstract: 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. JEL Classification: G21, G28, G33

Keywords: Financial crises; liquidity risk; regulation; wholesale funding (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cta
Date: 2010-07
Note: 3402164
References: Add references at CitEc
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Related works:
Journal Article: The dark side of bank wholesale funding (2011) Downloads
Working Paper: The dark side of bank wholesale funding (2010) Downloads
Working Paper: The Dark Side of Bank Wholesale Funding (2010) Downloads
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