Wholesale bank funding, capital requirements and credit rationing

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.

► Fact 1: Banks have moved from retail to unsecured wholesale, to collateralized wholesale finance.
► Fact 2: Capital requirements are rising under Basel III.
► Stiglitz–Weiss model of rationing extended to analyze different bank funding modes.
► Unsecured wholesale funding raises impact of capital requirements on credit rationing.
► Collateralized funding further expands incidence of credit rationing.