As retail deposits decline, banks tend to substitute wholesale funding in order to maintain their lending. This substitution, which tends to mitigate the impact of the policy tightening on lending, also increases the reliance of banks on wholesale funding. Of course, banks face varying degrees of financial frictions that can limit their access to wholesale funding. And banks that face fewer frictions—usually larger banks already more reliant on wholesale funding—are more capable of this type of substitution and thus increase their wholesale funding borrowing more. As a result, monetary tightening could lead to an increased overall reliance and more concentration of wholesale funding among large “systemic” banks.
The full article is available at http://libertystreeteconomics.newyorkfed.org/2016/03/would-monetary-tightening-increase-bank-wholesale-funding.html#.VtboBxiWZPU
