{"title":"Bank Funding Dynamics Between Retail Deposits and Wholesale Funds: Implications for Regulations","authors":"Yi Zheng, S. Drew Peabody","doi":"10.1007/s10693-024-00423-z","DOIUrl":null,"url":null,"abstract":"<p>This paper identifies a contemporaneous substitutional relationship between retail deposits and wholesale funds, while the lagged relationship between the two is rather weak-a finding consistent with our “stable capitalization hypothesis.” We find that this substitution effect is much more pronounced for banks facing retail deposit inflows compared to those facing outflows, suggesting that influxes of deposits allow banks to cut wholesale funding more aggressively to maintain their capital structures. This substitution effect is also negatively associated with wholesale funding maturity and riskiness. Furthermore, we show that the substitutional relationship is weaker during funding shocks such as the 2007-2009 financial crisis and that the substitution itself does not help banks maintain their lending, which supports the argument for a lender of last resort. Finally, we demonstrate that liquidity regulation curbs this substitution, which overall helps banks improve financial stability.</p>","PeriodicalId":51503,"journal":{"name":"Journal of Financial Services Research","volume":null,"pages":null},"PeriodicalIF":1.5000,"publicationDate":"2024-03-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Financial Services Research","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1007/s10693-024-00423-z","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This paper identifies a contemporaneous substitutional relationship between retail deposits and wholesale funds, while the lagged relationship between the two is rather weak-a finding consistent with our “stable capitalization hypothesis.” We find that this substitution effect is much more pronounced for banks facing retail deposit inflows compared to those facing outflows, suggesting that influxes of deposits allow banks to cut wholesale funding more aggressively to maintain their capital structures. This substitution effect is also negatively associated with wholesale funding maturity and riskiness. Furthermore, we show that the substitutional relationship is weaker during funding shocks such as the 2007-2009 financial crisis and that the substitution itself does not help banks maintain their lending, which supports the argument for a lender of last resort. Finally, we demonstrate that liquidity regulation curbs this substitution, which overall helps banks improve financial stability.
期刊介绍:
The Journal of Financial Services Research publishes high quality empirical and theoretical research on the demand, supply, regulation, and pricing of financial services. Financial services are broadly defined to include banking, risk management, capital markets, mutual funds, insurance, venture capital, consumer and corporate finance, and the technologies used to produce, distribute, and regulate these services. Macro-financial policy issues, including comparative financial systems, the globalization of financial services, and the impact of these phenomena on economic growth and financial stability, are also within the JFSR’s scope of interest. The Journal seeks to promote research that enriches the profession’s understanding of financial services industries, to elevate industry and product efficiencies, as well as to inform the debate and promote the formulation of sound public policies. Officially cited as: J Financ Serv Res