The Effect of Monetary Policy on Bank Wholesale Funding

We study how monetary policy affects the funding composition of the banking sector. When monetary tightening reduces the supply of retail deposits, banks attempt to substitute wholesale funding for deposit outflows to smooth their lending. Because of financial frictions, banks have varying degrees o...

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Bibliographic Details
Published in:Management science 2021-01, Vol.67 (1), p.388-416
Main Authors: Choi, Dong Beom, Choi, Hyun-Soo
Format: Article
Language:English
Subjects:
Bank deposits
bank lending channel
bank liability
Bank loans
Banking industry
Banks
cross-sectional heterogeniety
deposit
Effects
financial stability
Funding
liquidity regulation
Monetary policy
monetary transmission
Reliance
wholesale funding substitutions
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Summary:We study how monetary policy affects the funding composition of the banking sector. When monetary tightening reduces the supply of retail deposits, banks attempt to substitute wholesale funding for deposit outflows to smooth their lending. Because of financial frictions, banks have varying degrees of access to wholesale funding. Therefore, large banks, or those with greater reliance on wholesale funding, increase their wholesale funding more. Consequently, monetary tightening increases both the reliance on and the concentration of wholesale funding within the banking sector. Our findings also suggest that liquidity requirements could bolster monetary policy transmission through the bank lending channel. This paper was accepted by Tyler Shumway, finance .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2019.3463