What it means
Banks need funding to make loans. The traditional source is retail deposits, which are the many small balances held by individuals and small businesses.
Wholesale money is the alternative: large sums borrowed from other banks, pension funds, money market funds and corporations. Common instruments include overnight loans between banks, certificates of deposit, commercial paper, repurchase agreements (short-term loans secured on securities) and bonds.
Amounts are large, often millions of dollars at a time, and terms range from overnight to several years. Prices are based on market interest rates plus a margin reflecting the borrower's credit quality.
The main advantage is flexibility. A bank can raise large sums quickly without having to open branches and attract thousands of customers.
The main disadvantage is stability, because wholesale lenders can pull their funds at short notice if they lose confidence, whereas retail depositors tend to be slower to withdraw. Regulators and analysts watch how much a bank relies on wholesale money.
A high share of wholesale funding, especially short-term, makes a bank vulnerable if markets freeze, as happened to several institutions in past financial crises. Rules now require banks to hold liquid assets and to match the maturity of their funding to their lending.
Non-banks also use wholesale funding. Finance companies, leasing firms and fintech lenders rely on credit lines from banks and on selling bonds to investors.
Finance teams should know how much of their funding comes from wholesale sources and when it must be renewed. Pricing reflects the borrower's reputation.
A highly rated bank can borrow at a small margin above benchmark rates, while a weaker one pays more or may be shut out altogether. This link between credit quality and funding cost means that bad news can raise a bank's costs just when it can least afford them.
In practice
Real-world examples.
Example
A mid-sized bank has more loan demand than deposits. To fill the gap, it borrows $200,000,000 from other banks and money market funds for three months. The treasurer plans how to renew or replace this funding well before it falls due.
Example
A corporate treasurer places surplus cash in a large certificate of deposit with a bank. From the bank's side, this deposit is wholesale money because it comes from a corporate investor in a large amount.
Example
A consumer finance company issues bonds to institutional investors to fund its lending. The finance director tracks maturities closely to avoid having too much debt fall due at once. A maturity ladder, which spreads repayments evenly over time, is reviewed every quarter.
Formula
Calculation
Wholesale funding ratio = wholesale funding / total funding
Suppose a bank has total funding of $1,000,000,000, of which $300,000,000 comes from wholesale sources such as interbank loans and bonds, and $700,000,000 from retail deposits. Wholesale funding ratio = 300,000,000 / 1,000,000,000 = 30%. If $120,000,000 of the wholesale funding matures within 30 days, then the short-term share of wholesale funding is 120,000,000 / 300,000,000 = 40%.Case study
Seen in the real world.
Summit Mutual Bank is an illustrative, fictional lender that grew fast by relying on wholesale funding. Over three years, the share of wholesale funding rose from 15% to 45% of its $4,000,000,000 balance sheet.
When market confidence dipped, several lenders declined to roll over their loans, and the bank had to find $600,000,000 within two weeks. It sold assets at a discount and drew on emergency central bank facilities. The experience damaged its reputation, and its borrowing costs stayed higher than those of its peers for more than a year.
Afterwards, the board set a cap on wholesale funding at 25% of total funding and required a longer average maturity. The illustrative lesson is that wholesale money is flexible when markets are calm, but the dependence on it can become dangerous when confidence falls. The new policy also requires a monthly stress test of what would happen if half of the maturing wholesale funding were not renewed.
Watch out
Common mistakes.
- Treating wholesale funding as equivalent to deposits, when it can be withdrawn much more quickly.
- Looking only at the total amount, and ignoring how much of it matures in the next few weeks.
- Assuming wholesale money is always cheaper, when its cost rises sharply if the borrower's credit rating falls and new lenders demand a larger margin.
Questions
People also ask.
What counts as wholesale money?
Interbank loans, large certificates of deposit, commercial paper, repurchase agreements and bonds sold to institutional investors.
Why do regulators worry about it?
Because heavy reliance on short-term wholesale funding makes a bank vulnerable to sudden withdrawals, and one bank's difficulties can spread to others that lend to it.
Can non-banks use wholesale funding?
Yes, many finance companies and large corporates raise money from banks and investors in the same way, using credit lines, commercial paper and bonds.
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