Strong Wholesale Funding Regulations

Strong Wholesale
Funding Regulations
www.TheForexNittyGritty.com

The new US Federal Reserve
chairman, Janet Yellen, spoke recently
about strong wholesale funding rules.
As reported in the online Fox News,
http://www.theforexnittygritty.com/forex/strong-
wholesale-funding-regulations

Yellen focused on liquidity issues in
banks, a problem that has been
partially addressed by raising
international standards for the amount
of capital banks need to keep in
reserves.

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The need for strong wholesale funding
regulations goes back to the near
collapse of financial markets in 2008
when large banks did not have
sufficient cash and borrowers could
not get help in short term credit
markets.

The Fed believes that strong
wholesale funding regulations are
needed on top of the so called Basel
rules which raised capital reserve
requirements for major banks.

For those of us who are not
international bankers, however, just
what is wholesale funding?

Wholesale Funding

Banks rely on wholesale funding for
capital when deposits are low such as
when interest rates are very low or
when the economy is weak.

Wholesale funding is the use of other
sources of capital outside of core
deposits used by banks to manage
operations and limit risk.

Sources of wholesale funding include
monies from local, state and federal
sources, advances from the U.S.
Federal Home Loan Bank, the primary
credit program of the United States
Federal Reserve, foreign source
deposits, deposits from internet or CD
listing services and brokered deposits.

A major issue with wholesale funding
is that it is typically very interest rate
sensitive.

Sources of wholesale funding such as
wealthy foreign investors commonly
chase high interest rates and can
easily pull a large chunk of a bank’s
wholesale funding overnight.

Whatever the reason, when wholesale
funding drops off, a bank will not have
enough working capital to do business.

This is what happened to many large
banks during the recent financial crisis.

This is why Fed chairman Yellen is
talking about stronger wholesale
funding regulations.

Basically when banks are less
leveraged they are more secure.

However, the Fed has been fighting a
battle to insure liquid capital markets
since the 2008 market crash and
before and is not going to so tighten
up credit markets as to cause another
credit crunch.

Is Any of This
Working?

Deutsche Bank details its funding and
wholesale funding sources in its
Investor Relations Funding online
page.

Diversification of our funding profile in
terms of investor types, regions,
products and instruments is an
important element of our liquidity risk
management framework. Our most
stable funding sources are capital
markets and equity, retail, and
transaction banking clients.

Other customer deposits and borrowing
from wholesale clients are additional
sources of funding. Unsecured wholesale
funding represents unsecured wholesale
liabilities sourced primarily by our Global
Liquidity Management business. Given
the relatively short-term nature of these
liabilities, they are primarily used to fund
cash and liquid trading assets.

Unsecured wholesale funding comprises a
range of unsecured products e.g.
Certificates of Deposit (CDs), Commercial
Paper (CP) as well as term, call and
overnight deposits across tenors primarily
up to one year. In addition, included within
financing vehicles, is € 11 billion of asset-
backed commercial paper (ABCP) issued
through conduits.

The bank goes on to show through a
number of graphs where its wholesale
funding comes from.

Is the Fed Doing
Enough or Too
Much?

From the viewpoint of a Forex trader
stable financial markets are good for
hedging risk in international
transactions.

Volatile markets can lead to trading
profits if the speculator can
successfully anticipate which currency
will win and which will lose during a
financial meltdown.

Stronger whole funding regulations are
part of the picture of what the Fed is
doing.

And the stimulus program in which the
Fed purchased US Treasuries and
other bonds is another.

The Fed is tapering its stimulus
program and is generally expected to
close out monthly purchases by year
end. Interest rates are at issue here
and there effect on the economy,
national and global.

The current online issue of Forbes
speculates on when interest rates will
rise and a change in Federal Open
Market Committee interest rate
targets.

The FOMC participants raised their short-
term interest rate projections from 0.75%
by the end of 2015 to 1.0%. Though the
increase wasn’t very large, it was a move
the markets did not embrace judging by
the ensuing sell off in equities. The 2016
forecast jumped from 1.75% to 2.25%.
This also seems to indicate a change in
the FOMC’s thinking.

A concern for Forex traders is how well
the Fed under Yellen can handle all
that is on its plate. And a bigger
concern is how the market reads the
actions of the Fed and will over adjust
driving currency prices too high or too
low.

Strong Wholesale Funding Regulations

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