Why Banks Do Not Want to Depend on Only One Source of Funding

Funding concentration is the liability-side version of portfolio concentration

Banks understand that making every loan to one industry creates asset concentration. The same logic applies to liabilities.

If 60 per cent of funding comes from one small group of corporate depositors, the bank is exposed to their behaviour. If most market funding matures in the same month, it is exposed to one refinancing window. If most secured capacity depends on one collateral class, it is exposed to that asset’s eligibility and valuation.

funding concentration = too much bank survival depending on one common decision or condition.

Diversification is not about collecting as many labels as possible

A bank can have five funding products that all depend on the same market. It can have thousands of depositors who all respond to the same interest-rate shock. It can borrow in several currencies from the same investor base.

True diversification asks whether the sources fail for different reasons and on different clocks.

Different names do not guarantee different risk drivers.

Customer diversification matters inside deposits

A bank funded by millions of small household balances has a different withdrawal pattern from one funded by a few large corporate treasury accounts.

Large customers can move substantial sums with one decision. Smaller balances can also run, but the bank may need many separate decisions to produce the same outflow.

Funding analysis therefore looks at concentration by depositor, customer type and insurance status rather than treating “deposits” as one homogeneous category.

Market diversification matters inside wholesale funding

Wholesale funding can come from interbank markets, bonds, commercial paper, secured transactions and other institutional sources. Each market can have different participants and stress behaviour.

If unsecured investors pull back, secured markets may remain open. If short-term markets become expensive, longer-term issuance may still be possible. If one investor segment retreats, another may remain available.

That optionality is valuable precisely because the bank cannot know in advance which market will close first.

Maturity diversification prevents one date from controlling survival

A bank with S$10 billion of debt maturing evenly over five years has a different refinancing problem from one with S$7 billion maturing next quarter.

Even if both banks have the same total wholesale funding, the second has a much larger maturity cliff.

Spreading maturities reduces the amount of funding that must be replaced in any one market window.

Currency diversification is useful only when the currency is actually needed

A bank with US-dollar assets needs US-dollar funding or a credible way to transform other currencies into US dollars. Raising funding in several currencies can therefore improve resilience when the asset book is international.

But currency diversity can also create exchange-rate and basis risk if liabilities do not match assets. Diversification should solve a real balance-sheet need rather than add complexity for its own sake.

Collateral diversification matters for secured funding

A bank whose emergency funding depends entirely on one collateral class is vulnerable if that class becomes ineligible, illiquid or subject to larger haircuts.

A broader pool of high-quality, unencumbered assets can preserve more options.

Read Secured Bank Funding for the collateral mechanics.

Why banks pay more for funding they do not immediately need

A bank can issue longer-term debt before old funding matures. It can maintain dormant market programmes, operational arrangements and collateral documentation. It can keep relationships with several investor groups rather than only the cheapest one.

These choices can increase ordinary-day cost. They buy optionality.

Resilience often looks inefficient until the day the primary route fails.

A funding source should be tested against its failure mode

Source	Possible failure mode
Retail deposits	Rate competition, confidence loss, digital run
Corporate deposits	Large concentrated treasury withdrawals
Interbank funding	Counterparties cut limits
Unsecured bonds	Investors demand prohibitive spreads or refuse new issuance
Secured funding	Collateral haircuts rise or eligible assets run out
Foreign-currency funding	Cross-currency markets become stressed

Diversification means the bank is less likely to face all these failure modes at the same time.

Correlation is the hidden enemy of diversification

Suppose a bank has deposits, bonds and interbank funding. That appears diversified. But if all three depend on confidence in the same property-heavy asset book, one property shock can make depositors withdraw, bond investors retreat and banks cut counterparty limits simultaneously.

The funding sources were structurally different but economically correlated.

Good funding analysis therefore rotates the problem: “What common story causes several sources to fail together?”

A worked miniature

Bank A funds 80 per cent of itself through one online deposit platform because the deposits are cheap. Bank B uses 50 per cent diversified deposits, 20 per cent longer-term bonds, 10 per cent interbank funding and maintains secured capacity against unencumbered assets.

A rumour spreads online. Deposits on the platform become highly mobile. Bank A faces one very large common outflow. Bank B also loses deposits, but longer-term debt does not mature immediately and secured capacity remains available.

Bank B still has a problem. It has more ways to solve it.

Funding diversification buys decision time

The practical value of diversification is not merely lower expected loss. It gives management time to choose among alternatives instead of accepting the only remaining source at any price.

• retain deposits with pricing;
• issue term debt;
• borrow interbank;
• raise secured funding;
• sell liquid assets;
• reduce new lending;
• pre-fund upcoming maturities.

More credible doors make one closed door less dangerous.

Diversification does not mean every source should be used equally

A strong retail bank may rationally rely heavily on deposits. A wholesale bank may naturally use more market funding. A specialist institution may have a different structure again.

The goal is not a universal percentage mix. It is to know whether the institution can survive the plausible failure of its largest sources.

Funding diversity is a resilience principle, not a template.

The marginal source and the structural source are different

A bank can use one market for the next S$100 million of funding without wanting that market to finance half the institution. Treasury distinguishes the marginal source used today from the structural funding mix required over time.

This prevents a short-term pricing advantage from quietly becoming a long-term concentration.

Contingency funding planning assumes ordinary funding can fail

A contingency funding plan asks which routes remain executable if deposits leave, unsecured markets close or collateral haircuts increase.

The plan should identify triggers, authority, collateral, communication, market access and actions before stress becomes severe.

Batch 10 will deepen that operational response. Funding diversification provides the raw options the plan needs.

Diversification can protect pricing as well as access

A bank with only one funding route has weak negotiating power. If that source becomes expensive, it must accept the price or shrink abruptly.

A bank with several credible alternatives can choose among markets. That competition between funding sources can reduce average cost over time even if some standby routes look expensive individually.

The funding mix should fit the asset mix

A bank making long-term mortgages needs more durable funding than one holding mainly short-term liquid assets. A bank with foreign-currency loans needs matching currency capacity. A bank with large contingent credit lines needs additional liquidity for potential drawdowns.

Funding diversification is therefore not separate from the asset strategy. It is the liability-side architecture required to make that asset strategy survivable.

Four misconceptions to remove

Misconception	Better model
“Using the cheapest source maximises efficiency.”	Cheap concentrated funding can create expensive survival risk if the source disappears.
“Several funding products automatically mean diversification.”	Different products can still fail under the same common shock.
“Diversification means every bank should use the same funding mix.”	The right mix depends on business model, asset tenor, currency and customer base.
“Funding diversification is mainly about cost.”	Its deeper value is preserving access, optionality and decision time during stress.

A mastery test

1. What makes funding concentration dangerous?
2. Why can five funding products still share one risk driver?
3. How does maturity diversification reduce rollover risk?
4. Why can standby funding routes be worth paying for?
5. How should the funding mix relate to the asset mix?

If those answers connect, funding diversification becomes visible as a resilience architecture: not the search for the cheapest liability, but the design of enough independent routes that one closed door does not close the bank.

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