Bank runs and interventions with wholesale funding

We study how access to wholesale funding affects bank fragility when policymakers can intervene efficiently during a run. In a Diamond-Dybvig environment with a wholesale market, banks can refinance rather than liquidate assets. We show that the effect of wholesale borrowing on fragility depends both on the cost of funds and on the allocation of seniority among creditors. When wholesale lenders are senior, the availability of funds decreases fragility when borrowing is inexpensive; while when borrowing is costly, greater access to wholesale funding increases fragility because it delays intervention and increases depositors’ incentives to run. In contrast, when depositors are senior, wholesale borrowing always decreases fragility. These findings highlight that seniority allocation is a key determinant of how wholesale funding shapes policy responses and bank fragility. In particular, although recent episodes suggest that wholesale investors typically hold seniority, our findings suggest that granting priority to depositors could make the banking system less fragile.