What Is Wholesale Money?
Let me explain wholesale money to you directly: it's the large sums of money that financial institutions lend out in the money markets. This is part of wholesale banking, which includes trading in securities like Treasury bills, commercial paper, bankers’ acceptances, foreign or brokered deposits, certificates of deposit, bills of exchange, repo agreements, federal funds, and short-term mortgage or asset-backed securities.
Key Takeaways
- Wholesale money refers to large sums of money lent by financial institutions in money markets.
- As the subprime crisis showed, it is quick to arrange but dangerous to rely on.
- Wholesale money markets are a good leading indicator of stress in the financial system.
Understanding Wholesale Money
You need to know that wholesale money is how large corporations and financial institutions get working capital and other short-term financing—it's essential for the U.S. and global financial systems to function properly.
Wholesale funding can be arranged quickly, but it's dangerous to depend on it, as banks learned during the global financial crisis when the market for it collapsed. Banks that overused short-term wholesale funding and repurchase agreements, instead of relying on retail deposits, faced severe liquidity risks right when they needed liquidity the most.
Take the collapse of Lehman Brothers in the 2008 financial crisis as an example: a bank run followed, with investors pulling out their wholesale funds. Wachovia reportedly lost about 1% of its funds, or around $5 billion. The FDIC directed Wachovia to negotiate a takeover with Citigroup and Wells Fargo rather than file for bankruptcy, and over a weekend, it was sold to Wells Fargo for about $15 billion.
Another key moment in the subprime crisis was in 2007, when Northern Rock, a British bank that depended heavily on wholesale markets for financing, could no longer fund its lending and had to seek emergency funding from the Bank of England.
Indications of Wholesale Money Markets
Wholesale money markets serve as a strong leading indicator of stress in the financial system—they give a more accurate view of borrowing costs than the official interest rates set by central banks. Today, the OIS discounted overnight rate is a critical measure of credit risk in the banking sector, based on short-term benchmark rates like the Federal Funds Rate.
The ongoing demand for high-quality liquid assets (HQLA) in global markets shows that wholesale money markets are far from fully repaired, even as global systemically important banks (G-SIBs) meet new Basel III requirements, such as the liquidity coverage ratio and net stable funding ratio.
In the U.S., new money market regulations took effect in 2016, but the Federal Reserve will need to continue providing stability through its Reverse Repurchase (RRP) facility for a while. This is because rising interest rates boost banks' reliance on wholesale funding by decreasing retail deposits, which in turn heightens systemic risk.
Other articles for you
Hot wallets are internet-connected cryptocurrency storage solutions that offer convenience for transactions but come with higher security risks compared to offline cold wallets.
The reserve-replacement ratio measures an oil company's ability to replenish reserves relative to production to assess sustainability.
Demographic dividend is the economic growth from a population's changing age structure due to declining fertility and mortality rates.
Net investment income (NII) is taxable income from investments minus expenses, subject to a 3.8% tax for high earners.
Merchandising is the strategic promotion and sale of goods in retail to enhance customer experience and drive sales.
Management fees are charges by investment managers for handling funds, varying by fund type and often impacting investor returns.
Quartiles divide datasets into four equal parts to analyze data spread and distribution.
A Pell Grant is a need-based federal financial aid for undergraduates that doesn't require repayment.
The Industrial Revolution was a transformative period of mechanization and innovation that shifted societies from agrarian to industrial economies.
A syndicated loan is financing provided by a group of lenders to a single borrower to spread risk on large-scale projects.