Volatile Lending and Bank Wholesale Funding

45 Pages Posted: 5 Oct 2014

See all articles by Valeriya Dinger

Valeriya Dinger

Universität Osnabrück

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Date Written: October 2, 2014

Abstract

The paper presents the first empirical study of the relation between bank loan volume volatility and bank retail and wholesale liabilities. We argue that since the volume of retail deposits is inflexible, banks facing volatile loan demand tend to fund loans with larger shares of wholesale rather than retail liabilities. We empirically confirm this argument using a unique dataset constructed from the weekly financial reports of 104 large U.S. commercial banks. The high frequency of the data allows us to employ dynamic identification schemes which mitigate reverse causality and selection concerns. Our results imply that the introduction of regulatory limits on wholesale liabilities will increase the exposure of banks to loan demand shocks. Such a regulation will also inhibit the ability of the banking sector to service more volatile loans. This may smooth the lending cycles, but it will also slow recoveries of lending volume after a substantial recession.

Keywords: wholesale funding, retail deposits, loan volume volatility

JEL Classification: G21, E44

Suggested Citation

Dinger, Valeriya and Craig, Ben R., Volatile Lending and Bank Wholesale Funding (October 2, 2014). FRB of Cleveland Working Paper No. 14-17, Available at SSRN: https://ssrn.com/abstract=2505167 or http://dx.doi.org/10.2139/ssrn.2505167

Valeriya Dinger

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

Ben R. Craig (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-2061 (Phone)
216-579-3050 (Fax)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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