The Dark Side of Bank Wholesale Funding

By Rocco R. Huang, Lev Ratnovski. Social Science Research Network, 2010

507 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/1976613b385ecc24a2971ddf07eb3406f2f228ff

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Citations in the corpus

Short-Term Wholesale Funding and Systemic Risk: A Global Covar Approach (2012, unknown): “Whereas it is agreed that wholesale funding provides certain managerial advantages (see Huang and Ratnovski, 2011, for a discussion), the effects on systemic risk of an overreliance on these liabilities were under-recognized prior to the recent financial crisis.”
Balance Sheet Strength and Bank Lending During the Global Financial Crisis (2013, unknown): “11 These results corroborate previous studies on the transmission of shocks through the bank lending channel, and provide evidence for the “dark side” of wholesale funding (Acharya, Gale and Yorulmazer, 2011; Huang and Ratnovski, 2011), through which financial institutions reliant on market-based fu”
Incentives to Innovate and Financial Crises (2012, unknown): “6 Huang and Ratnovski (2011) have also theoretically examined the risks associated with wholesale bank funding of this sort.”
Bank/Sovereign Risk Spillovers in the European Debt Crisis (2012, background): “The recent crisis, however, also brought out the dark side of bank wholesale funding, as described by Huang and Ratnovski (2011).”
Thoughts on Financial Accounting and the Banking Industry (2014, unknown): “6 For example, it has been posited that recent bank liquidity crises were caused by increased uncertainty over banks’ solvency as assessed by participants in wholesale funding markets (Shin, 2009; Goldsmith-Pinkham and Yorulmazer, 2010; Huang and Ratnovski, 2011).”
Bank Risk During the Financial Crisis: Do Business Models Matter? (2011, background): “…stable in periods of crisis (Shleifer and Vishny, 2010): since they are typically insured by the government, their withdrawals in most circumstances are usually predictable at the aggregate level and mostly linked to depositors’ liquidity needs (Song and Thakor, 2007; Huang and Ratnovski, 2011).”