Assistant Professor Drew Peabody in the Department of Finance joined with a researcher from SUNY New Paltz to examine how banks’ balance retail deposits and wholesale funding in ongoing efforts to maintain financial stability.
An Elon University professor teamed with a counterpart from the State University of New York at New Paltz for a new article that explores the delicate balancing act banks perform to ensure their stability.
Published in the Journal of Financial Services Research, “Bank Funding Dynamics Between Retail Deposits and Wholesale Funds: Implications for Regulations” by Elon University Assistant Professor Drew Peabody and Assistant Professor Yi Zheng delves into the mechanisms banks use to manage their two main sources of funding: retail deposits from the public and wholesale funding from other financial institutions.
Their article explains how banks constantly adjust how much they rely on both sources of funding to balance their solvency and risk. Banks prefer retail deposits because they’re considered safer and more stable during normal times, the researchers write, but they can be flighty in hard times and leave banks subject to runs. On the other hand, wholesale funding is viewed as riskier and more expensive to banks due to differences in repayment terms. Banks need to strike a healthy balance between these two sources of funding without taking on too much risk.
The study points out that banks are careful about their borrowing, especially during uncertain economic times. During financial crises, like the one in 2007-2009, bank stability weakened when it was more difficult for financial institutions to borrow money. New rules introduced after the crisis required banks to keep more money on hand should similar situations arise.
“The research underscores the importance of having rules and safety nets, like support from central banks, to help banks during tough times,” Peabody said.
Peabody previously taught at the University of Texas Dallas before joining Elon University in 2021. He currently teaches Advanced Managerial Finance, Venture Capital Financing, and Finance Foundations. Research interests include corporate financing, valuation, financial technology, and venture capitalism.
Peabody was recently awarded the Love School of Business Dean’s Award for Excellence in Scholarship 2023. He also is a co-adviser to Elon’s student team for the Venture Capital Investment Competition.