FMFI Essay
Explain why developments in wholesale banking since 2000 have contributed to problems to problems in the more advanced wholesale banking during the 2008-2009 crises.
(Question 2 July 2012)

INTRO
‘Wholesale banking is a collective term that, as its name would imply, refers to the bank-to-bank markets and instruments, often termed the inter-bank market. More often this definition is extended nowadays to include any inter-financial institution dealings including those of hedge funds and other investment companies. (S James 2008)
Most of Britain's big banks split 50:50 between wholesale and retail funding. The Nationwide receives 75 per cent of its funding from retail deposits - the obverse of the Rock. (S James 2008)

Factors which led to the Financial crisis of wholesale banking
Regulators such as Turner (2009) have identified excessive securitization, high leverage, extensive market trading and a bonus culture, as being major factors in bringing about the bank centred financial crisis of 2007-9.

LACK OF REGULATION (Northern Rock)
All these instances of British banking failure, and in some cases rescue, have a theme in common. When the crisis is over, regulatory mistakes are nearly always seen to be among the problems. . (Brummer 2007)
Britain, with its split regulation, has the worst of all worlds, and Northern Rock customers and investors have been ill-served. It took the personal intervention of the Prime Minister and the Chancellor, Alistair Darling, fearful of losing a reputation for economic competence, to calm matters. But it is hardly a performance that inspires confidence. . (Brummer 2007)

Securitisation.
Banks and building societies use various methods to raise funds for mortgages. These include using the money held in deposit accounts, borrowing from the wholesale markets, where banks lend to each other, and selling existing mortgage debts on to other institutions to raise funds for new home loans – this is a process known as securitisation. (Brummer 2007)
Northern Rock relied more heavily on securitisation and buying funds from the wholesale markets, than most of its UK counterparts but this strategy ran into trouble. . (Brummer 2007)
Steep interest rate increases in the United States led to a huge increase in the number of homeowners unable to meet their mortgage payments. Worst affected were sub-prime borrowers – those on low incomes with poor credit histories. However, the ramifications of the American mortgage problem spread worldwide and sparked the global credit crisis. (As a result the wholesale market virtually dried up.

OFF-BALANCE SHEET
Off-balance-sheet business can be defined as any activity that does not lead to an entry on the institution’s balance sheet. Contingent claims are claims that are not captured on the balance sheet under normal accounting conventions but which involve the bank in an obligation should a particular contingency occur. (Buckle & Thompson 1998)
This activity can mislead major officials by suggesting that companies are doing well however can be close to bankruptcy. Companies should be realistic rather be optimistic. (Buckle & Thompson 1998)

USES OF ASSET BACKED SECURITIES
An ‘asset-backed securities’ is a tradable financial instrument, which is supported by a pool of loans. The sale removes assets from the balance sheet of the bank and provides funds for alternative uses. Hence the sale of an ABS assists the bank in the management of its liquidity position. However this can increase the % of debt and can jeopardise the wholesale bank. (Buckle & Thompson 1998)

ROLLOVER CREDITS
As a large proportion of wholesale banks funding is relatively short-term, the banks interest costs rise and fall in line with market interest rates