Wholesale Deposit

A wholesale deposit is money placed with a bank by a customer that is not treated as a retail customer: a large non-financial company, a financial institution such as another bank, fund or insurer, a government or public sector body, or a central bank. Wholesale deposits are typically large, negotiated individually and only partly covered, if at all, by deposit insurance.

The term is used in contrast to retail deposits from households and small firms. Wholesale deposits are an important source of funding, especially for banks that provide transaction banking services, but regulators regard them as less stable, because sophisticated depositors move money quickly in response to interest rates or doubts about a bank's health. Much of the money that left Silicon Valley Bank in March 2023 was wholesale in nature.

Picture a market trader who sells mostly to a few large restaurants rather than to hundreds of shoppers. Each restaurant buys a lot, so business is good, but each also has a purchasing manager who compares prices every week and will switch suppliers the moment they hear a rumour of trouble.

Wholesale depositors are like those restaurants. They bring the bank large sums, but they watch rates and risk closely, and they can move their money in a single phone call or a few clicks.

• Operational deposits. Balances that corporate and institutional clients keep at a bank because they use its clearing, custody or cash management services, such as accounts used to pay salaries and suppliers.
• Non-operational corporate deposits. Surplus cash a company places with a bank for yield, often in call accounts or short-term time deposits.
• Financial institution deposits. Money placed by other banks, funds, insurers and broker-dealers, including interbank placements.
• Public sector deposits. Balances of governments, municipalities and public agencies, which in some countries must be collateralised.
• Brokered and marketable deposits. Deposits placed through intermediaries and negotiable certificates of deposit traded in the money markets.

Under the Basel III liquidity coverage ratio, banks must assume that a large share of wholesale deposits would leave in a 30-day stress. The standard assigns a run-off rate of 25 per cent to operational deposits, 40 per cent to non-operational deposits from non-financial companies, sovereigns and public bodies, falling to 20 per cent if the whole balance is insured, and 100 per cent to non-operational deposits from financial institutions. These compare with 3 to 10 per cent for retail deposits. The net stable funding ratio similarly treats short-term wholesale funding from financial institutions as providing little or no stable funding.

Classifying a deposit as operational is not automatic. The Basel standard expects the client to rely on the bank for clearing, custody or cash management under a formal agreement, with significant cost or notice involved in moving the service elsewhere. Only the part of the balance actually needed to run those services counts; any excess cash a corporate leaves in the same account must be treated as non-operational. Banks therefore analyse account behaviour, such as average balances compared with daily payment flows, to estimate the operational portion, and supervisors review those methods because they materially affect a bank's reported liquidity ratios.

Wholesale depositors are rate-sensitive, so banks usually pay rates close to money market levels, giving wholesale deposits a high deposit beta. Corporate treasurers spread cash across several banks to limit counterparty exposure and often follow investment policies that require minimum credit ratings, so a downgrade can trigger withdrawals. Some banks offer earnings credits instead of interest on operational accounts, which offset fees for cash management services. Pricing is negotiated and may vary with balance size, tenor and the overall relationship.

Because most wholesale balances exceed insurance limits, they are among a bank's uninsured deposits and the first to run. In March 2023, depositors withdrew 42 billion dollars from Silicon Valley Bank in a single day, much of it from venture-backed companies whose treasurers were moving cash on the advice of investors and on social media. The episode showed that even operational deposits can leave rapidly when concentrated in one sector and when digital banking allows near-instant transfers. Supervisors have since focused more on deposit concentration, the speed of potential outflows and banks' ability to raise liquidity quickly, including through central bank facilities. Banks with high reliance on wholesale funding are also monitored for deposit migration towards money market funds and larger banks when rates rise.

• Basel Committee: Basel III Liquidity Coverage Ratio