Over the past few weeks, we’ve discussed the impact of monetary policy on wholesale funding. In aggregate, the demand for wholesale funding increases as rates rise in order to offset the decline in core deposits. This week, we dive deeper into the details and look at some of the cross-sectional differences between banks.

According to recent work by the Fed, banks that utilize wholesale funding are better able to smooth their lending. Specifically, banks that are more active — those that quickly substitute wholesale funding for retail deposits when retail deposits fall — have historically seen their lending decline by less in a rising rate environment.

In addition, banks with the majority of depositors below age 65 have had to tap more wholesale funding, because younger depositors tend to be more rate sensitive. This will likely be a key consideration over the coming quarters, as we’ve seen a large amount of surge deposits from younger depositors over the past few years.

Understanding the sensitivity and composition of deposits — and having access to wholesale funding to fill liquidity gaps — will be critical during this tightening cycle.