Wholesale Funding Dry-Ups
66 Pages Posted: 23 Nov 2015 Last revised: 1 Mar 2017
Date Written: February 27, 2017
We empirically explore the fragility of wholesale funding of banks, using transaction level data on short-term, unsecured certificates of deposits in the European market. We do not observe any market-wide freeze during the 2008-2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration of bank performance. Furthermore, in periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. Thus, we fail to find evidence consistent with classical adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.
Keywords: wholesale funding, market freeze, certificates of deposits
JEL Classification: G21
Suggested Citation: Suggested Citation