Bank wholesale funding in an era of rising geopolitical risk

This paper examines the impact of geopolitical risk on bank wholesale funding using a sample of 2333 commercial banks in 41 countries over the period 2002-2021. Evidence suggests that increased geopolitical risk reduces the share of bank wholesale funding. Interestingly, our finding is driven by small and medium-sized banks, as large banks do not lose funding from wholesale financiers when geopolitical risk is higher. Delving into the mechanisms that drive our findings, we find that wholesale financiers rely on noisy public signals on bank asset quality such as insolvency risk, earnings volatility and bad debts to determine whether to refinance or withdraw their financing. Small banks lose funding from both informed and uninformed wholesale financiers as their asset quality is adversely affected when geopolitical risk is elevated. Large banks with better asset quality are not significantly affected by geopolitical risk and benefit from the flight-to-safety motive.