Wholesale Money: What it is, How it Works

What Is Wholesale Money?

Wholesale money refers to the large sums of money lent by financial institutions in the money markets. This wholesale banking encompasses the market for tradable securities, such as Treasury bills, commercial paper, bankers’ acceptances, foreign or brokered deposits, certificates of deposit, bills of exchange, repo agreements, federal funds, and short-lived mortgage and asset-backed securities.

Understanding Wholesale Money

Wholesale money is a way for large corporations and financial institutions to obtain working capital and other types of short-term financing—and it is critical to the proper functioning of the U.S. and global financial systems.

Wholesale funding can be quick to arrange but dangerous to rely on, as banks discovered during the global financial crisis when the wholesale funding market collapsed. Excessive use of short-term wholesale funding—instead of retail deposits—and repurchase agreements left banks exposed to liquidity risk when liquidity mattered most.

An example of this occurred after the collapse of Lehman Brothers during the 2008 financial crisis. A bank run ensued and investors took out their wholesale funds. Wachovia is reported to have lost approximately 1% (or approximately $5 billion) of its funds. The bank was directed by FDIC to negotiate with Citigroup and Wells Fargo for a takeover instead of filing for bankruptcy. Over a weekend, it was sold to Wells Fargo for approximately $15 billion.

A defining moment of the subprime crisis happened in 2007, when Northern Rock, a British bank that had relied on wholesale markets for most of its finance, was no longer able to fund its lending activities and had to ask the Bank of England for emergency funding.

Indications of Wholesale Money Markets

Wholesale money markets are therefore a good leading indicator of stress in the financial system—and paint a truer picture of the cost of borrowing than central banks’ official interest rates. Today, the OIS discounted overnight rate has become a key measure of credit risk within the banking sector, using short-term benchmark rates such as the Federal Funds Rate.

The demand for high quality liquid assets (HQLA) in the global financial markets suggests that wholesale money markets are a long way from being repaired, even as global systemically important banks (G-SIBs) comply with new Basel III capital and liquidity measures—such as the liquidity coverage ratio and the net stable funding ratio.

In the U.S., new money market regulations came into force in 2016, but the Federal Reserve will have to provide stability to the lending markets through its Reverse Repurchase (RRP) facility for some time. This is because rising interest rates increase banks’ reliance upon wholesale funding by reducing retail deposits. This, in turn, increases systemic risk.