Wholesale Funding and Liquidity Creation

47 Pages Posted: 20 Jun 2020 Last revised: 5 Jul 2022

See all articles by George Kladakis

George Kladakis

The Business School, Edinburgh Napier University

Lei Chen

University of Sheffield, Management School

Sotirios K. Bellos

University of Sheffield - University of Sheffield International Faculty

Date Written: May 27, 2020

Abstract

Although banks possess superior liquidity risk management skills, the financial crisis of 2007-2009 severely affected their liquidity buffers. This led to increasing concerns by regulators on the adverse effects of reliance on unstable wholesale funding. Building on the growing literature on bank wholesale funding, this paper examines the effect of wholesale funding on liquidity creation, the main function of banks in the economy through which they fund illiquid loans with liquid deposits. Consistent with the recent criticism of the role of unstable funding, our findings suggest that (especially short-term) wholesale funding can have a negative effect on liquidity creation which can be attributed to greater exposure to liquidity shocks. Our results are robust to several tests that address concerns about potential endogeneity and other issues.

Keywords: wholesale funding, liquidity creation, bank liquidity

JEL Classification: G20, G21, G32

Suggested Citation

Kladakis, George and Chen, Lei and Bellos, Sotirios K., Wholesale Funding and Liquidity Creation (May 27, 2020). Available at SSRN: https://ssrn.com/abstract=3611569 or http://dx.doi.org/10.2139/ssrn.3611569

George Kladakis (Contact Author)

The Business School, Edinburgh Napier University ( email )

219
Colinton Rd
Edinburgh, Edinburgh EH14 1DJ
United Kingdom

Lei Chen

University of Sheffield, Management School ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

Sotirios K. Bellos

University of Sheffield - University of Sheffield International Faculty ( email )

Thessaloniki
Greece

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