Wholesale funding and liquidity creation

Abstract

We examine the relationship between wholesale funding and liquidity creation using a sample of 825 banks in 84 countries during the post-crisis period of 2010–2020. We find that asset-side liquidity creation is consistently negatively associated with short-term wholesale funding, but not with long-term wholesale funding. Our results suggest that the relationship of short-term wholesale funding with asset-side liquidity creation is significantly driven by a negative relationship with illiquid lending. Moreover, our results show that the negative relationship between wholesale funding and liquidity creation is positively moderated by asset risk, suggesting the presence of moral hazard incentives. Our results are robust to a series of tests and have important implications for bank liquidity regulation.