The dark side of bank wholesale funding

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. JEL Classification: G21, G28, G33Financial crises, liquidity risk, regulation, Wholesale Funding

What do we Know About the Effects of Macroprudential Policy, De Nederlandsche Bank Working

Abstract The literature on the effectiveness of macroprudential policy tools is still in its infancy and has so far provided only limited guidance for policy decisions. In recent years, however, increasing efforts have been made to fill this gap. Progress has been made in embedding macroprudential policy in theoretical models. There is increasing empirical work on the effect of some macroprudential tools on a range of target variables, such as quantities and prices of credit, asset prices, and on the amplitude of the financial cycle and financial stability. In this paper we review recent progress in theoretical and empirical research on the effectiveness of macroprudential instruments. Keyword

Bank liquidity regulation and the lender of last resort

Banks can make suboptimal liquidity choices and gamble for lender of last resort (LOLR) support. Endogenous bailout rents are driven by the need to preserve bankers' incentives under uncertain net worth. In equilibrium, banks can herd in risk management, choosing suboptimal liquidity when they expect others to do so. Optimal liquidity can be restored by quantitative requirements, but such regulation is costly. An LOLR policy incorporating bank capital information can reduce distorting rents and allow for a more efficient solution, but may only be possible in transparent economies.Liquidity Bank regulation Lender of last resort Bailout Transparency

Why Are Canadian Banks More Resilient?

This paper explores factors behind Canadian banks'' relative resilience in the ongoing credit turmoil. We identify two main causes: a higher share of depository funding (vs. wholesale funding) in liabilities, and a number of regulatory and structural factors in the Canadian market that reduced banks'' incentives to take excessive risks. The robust predictive power of the depository funding ratio is confirmed in a multivariate analysis of the performance of 72 largest commercial banks in OECD countries during the turmoil.Banking crisis;Financial stability;Banking sector;Commercial banks;Depositories;Economic models;capital injection, banking, bank performance, bank of canada, bank capital, banking corporation, capital regulation, tier 1 capital, equity ratio, capital requirement, capital ratio, bank funding, equity prices, bank stock, debt service, capital markets, cost of capital, bank size, capital market, banking market, bank liquidity, capital outflows, basel accord, bank recapitalizations, bank runs, bank distress, brokered deposits, mortgage lending, bank capital regulation, banks with assets, capital needs, recapitalization, banking sector problems, bank deposits, deposit insurance, bank losses, government bonds, banks ? asset, bank branch, banks ? balance sheet, banking services, bank regulations, government securities