Wholesale Funding Dry‐Ups

Abstract

We empirically explore the fragility of wholesale funding of banks, using transaction‐level data on short‐term, unsecured certificates of deposit in the European market. We do not observe a market‐wide freeze during the 2008 to 2014 period. Yet, many banks suddenly experience funding dry‐ups. Dry‐ups predict, but do not cause, future deterioration in bank performance. Furthermore, during periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. We therefore fail to find evidence consistent with adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.

Unsecured and Secured Funding

“…In contrast, when some lenders are informed by monitoring borrowers, higher credit risk should lead to less unsecured borrowing (H5). , 2007;Furfine, 2001) and in the European non-interbank wholesale funding market (Perignon, Thesmar, and Vuillemey, 2018). As predicted by H5, banks with a worse credit rating tend to borrow less in the unsecured market.…”

“…We contribute to the existing empirical literature on interbank funding by jointly analyzing unsecured, secured borrowing and lending at the bank level. The existing empirical literature focuses on individual segments of the wholesale funding market, such as the unsecured money market in the United States (Ashcraft and Duffie, 2007;Afonso, Kovner, and Schoar, 2011a), in the euro area (Brunetti, di Filippo, and Harris, 2011;Angelini, Nobili, and Picillo, 2011;Garcia-de-Andoain, Hoffmann, and Manganelli, 2014;Garcia-de-Andoain et al, 2016;Perignon, Thesmar, and Vuillemey, 2018), and in the United Kingdom (Acharya and Merrouche, 2013). Similarly, exiting papers study secured money markets in isolation, covering the United States (Gorton and Metrick, 2012;Krishnamurthy, Nagel, and Orlov, 2014;Copeland, Martin, and Walker, 2014) and…”

Endogenous debt maturity and rollover risk

“…There are several differences between our work and Pérignon et al. (): they focus on short‐term certificates of deposits issued by French banks, while we focus on debt instruments with original maturity between one and 30 years, issued by the largest international banks; moreover, they regress future ROA on current funding dry‐ups (treating funding dry‐ups as the independent variable), while we argue that understanding rollover risk hinges on identifying the causal effect of market expectations on funding conditions (amounts and maturity of debt issuance).…”

“…In another related paper, Pérignon, Thesmar, and Vuillemey () show that a bank currently experiencing a drop in unsecured funding is going to perform poorly in the coming months. Also, in line with our findings, they show that funding dry‐ups are preceded by debt maturity shortening.…”

Global banking and the conduct of macroprudential policy in a monetary union

“…The modelling device to introduce international borrowing is analogous to trade channels through a CES as in Poutineau and Vermandel (2015) and Brzoza-Brzezina et al (2015). The total amount borrowed by the representative bank reads 13 We suppose that they follow an exogenous AR(1) shock process ε B i,t such that, liabi,t = e ε B i,t liabi, this shock captures some aggregate movements in the funding constraint araising from the wholesale funding market, see for instance Pérignon et al (2017) for an analysis of liquidity runs on the French unsecured market of certificates of deposits.…”