What Does Wholesale Funding Mean?

Wholesale funding means that a financial institution receives deposits from sources outside of traditional consumer and retail deposits. These funds come from larger entities, such as governments or fellow financial institutions. Wholesale funding differs from retail funding in that the latter focuses heavily on small businesses like stores and restaurants.

When a large entity like a bank or state agency needs financing, it turns to a financial institution to provide it. Wholesale banking services can include loans for equipment and other large purchases, merchant banking, assistance with cash management and more. You don’t have to look far to find a financial institution that engages in wholesale funding services. Most banks do.

The term “wholesale funding” isn’t a misnomer. Just as warehouse clubs like Costco offer discounts to members, banks provide these services at reduced fees to those who qualify. But the reason these services are limited to large entities is that they’re designed for organizations that operate with large cash reserves. Generally, there are minimum balances and transaction requirements attached to these accounts, so it wouldn’t appeal to a struggling business with limited assets.

Often businesses that engage in wholesale funding deal in brokered deposits. Brokers divide their clients’ funds between multiple institutions, ensuring each account meets the cash reserve minimum. This helps satisfy FDIC limitations on the insurance it will offer each accountholder in the event a bank goes under. Banks are required to meet capital requirements before being allowed to accept brokered deposits.

There is, of course, a benefit to the banks offering wholesale rates to large entities. Although individual accountholders may pay full price for various fees, their activity can be unreliable. The large deposits provided through wholesale funding offers financial institutions the money they need to issue large loans to their commercial and individual customers. They can then earn interest on those loans, increasing their solvency.

Unfortunately, with any activity comes risks. Regulators are monitoring wholesale funding among financial institutions, fearing that some have become too reliant on these cash reserves. They’re particularly worried that banks may be getting too much of their overall capital from wholesale funding. If they’re then relying on those funds as they issue large construction loans, for instance, this could lead to a greater liquidity risk. If a bank funds a huge project and the economy takes a turn for the worse, that bank could find itself in danger. Regulators are also watching financial institutions’ loan-to-deposit ratios in general to ensure they are also keeping in mind all of the potential risks they could face once large loans are issued.