The Dark Side of Bank Wholesale Funding

29 Pages Posted: 14 Feb 2011  

Lev Ratnovski

International Monetary Fund

Rocco Huang

Michigan State University - Department of Finance; Wharton Financial Institutions Center

Multiple version iconThere are 2 versions of this paper

Date Written: May 2010

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.

Suggested Citation

Ratnovski, Lev and Huang, Rocco, The Dark Side of Bank Wholesale Funding (May 2010). IMF Working Papers, Vol. , pp. 1-28, 2010. Available at SSRN: https://ssrn.com/abstract=1760359

Lev Ratnovski (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
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HOME PAGE: http://ratnovski.googlepages.com

Rocco Huang

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.roccohuang.com

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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