The effect of monetary policy on bank wholesale funding

Abstract: We study how monetary policy affects the funding composition of the banking sector. When monetary tightening reduces the retail deposit supply, banks try to substitute the deposit outflows with wholesale funding to smooth their lending. Banks have varying degrees of accessibility to wholesale funding owing to financial frictions, hence large banks, or those with a 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.

Keywords: bank funding; monetary policy transmission; systemic stability; liquidity regulation; bank lending channel;

JEL Classification: E52; E58; G21; G28;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2017-04-01

Number: 759