Wholesale funding refers to the flow of capital from institutional agents with excess liquidity to those in need of short-term refinancing. Lenders generally have large sums of money at their disposal and are looking for safe and liquid investment vehicles. Net creditors are generally hedge funds, money market funds, life insurers, or other financial institutions via the practice of repo.
On the one hand, access to these liquidity pools makes it easier to cope with shocks, such as the unexpected withdrawal of certain depositors (Goodfriend and King, 1998), while imposing a certain form of market discipline inherent in the constant threat of non-renewal of short-term loans (Calomiris and Khan, 1991).
On the other hand, this source of funding was mainly used during the pre-crisis period as a means of financing the faster expansion of banks’ balance sheets than traditional retail deposits (Hahm et al., 2012). However, this more unstable short-term financing increased the vulnerability of banks, which faced a liquidity crunch or « market freeze » in 2008. The wholesale finance market exacerbates risks when uncertainty about the health of borrowers becomes too great (Huang and Ratnovski, 2008).
Thibaut D.
Reference:
Goodfriend, M. and King, R.G. (1998). Financial Deregulation, Monetary Policy, and Central Banking, Federal Reserve Bank Richmond Economic Review, 3-22.
Hahm, J., Shin, H., and Shin, K. (2012). Non-Core Bank Liabilities and Financial Vulnerability, NBER working paper 18428.
Huang, R. and Ratnovski, L. (2008). The Dark Side of Wholesale Funding, Federal Reserve Bank of Philadelphia working paper 09-3.
Calomiris, C., & Kahn, C. (1991). The Role of Demandable Debt in Structuring Optimal Banking Arrangements, The American Economic Review, 81(3), 497-513.
