Journal
JOURNAL OF FINANCIAL INTERMEDIATION
Volume 20, Issue 2, Pages 248-263Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.jfi.2010.06.003
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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. (C) 2010 Elsevier Inc. All rights reserved.
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