Wholesale Bank Funding, Capital Requirements and Credit Rationing

Home , Rationing

WP/13/30

Itai Agur

©International Monetary Fund. Not for Redistribution

IMF Working Paper

IMF - Singapore Regional Training Institute

Wholesale Bank Funding, Capital Requirements and Credit Rationing1

Prepared by Itai Agur

Authorized for distribution by Sunil Sharma

January 2013

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Abstract

This paper analyzes how different types of bank funding affect the extent to which banks ration credit to borrowers, and the impact that capital requirements have on that rationing. Using an extension of the standard Stiglitz-Weiss model of credit rationing, unsecured wholesale finance is shown to amplify the credit market impact of capital requirements as compared to funding by retail depositors. Unsecured finance surged in the pre-crisis years, but is increasingly replaced by secured funding. The collateralization of wholesale funding is found to expand the extent of credit rationing.

JEL Classification Numbers:G21, G28

Keywords: Rationing, capital requirements, wholesale finance, unsecured, collateral

Author’s E-Mail Address:[email protected]

1 This paper is forthcoming in the Journal of Financial Stability. It has benefited from the author's discussions with José-Luis Peydró, Thorsten Beck, Hans Degryse, Gabriele Galati, and Jan Kakes, and from the comments of audiences at the Dutch Central Bank and the Basel RTF Working Group hosted at the UK FSA.