Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153657
Authors: 
Huang, Rocco
Ratnovski, Lev
Year of Publication: 
2010
Series/Report no.: 
ECB Working Paper 1223
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.
Subjects: 
Financial crises
liquidity risk
regulation
Wholesale Funding
JEL: 
G21
G28
G33
Document Type: 
Working Paper

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