The Dark Side of Bank Wholesale Funding

Lev Ratnovski () and Rocco Huang

No 2010/170, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; wholesale financier; interest rate; monetary value (search for similar items in EconPapers)
Pages: 28
Date: 2010-07-01
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Citations: View citations in EconPapers (30)

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Related works:
Journal Article: The dark side of bank wholesale funding (2011)
Working Paper: The dark side of bank wholesale funding (2010)
Working Paper: The dark side of bank wholesale funding (2009)
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