Prediction 3. During monetary tight

Prediction 3. During monetary tightening, banks that rely more heavily on wholesale funding and/or are larger become more reliant on wholesale funding. Hence, wholesale funding becomes more concentrated in the banking sector. Suppose that the private and social costs of wholesale funding deviate because, for example, individual banks do not consider pecuniary externalities through a fire sale of assets (e.g., Lorenzoni 2008, Stein 2012), which becomes more likely as the reliance on wholesale funding increases. This wedge should be greater for larger banks because they impose more external ties on others during fire-sale episodes. Our prediction indicates that this distortion will become greater during monetary tightening, as larger banks add more wholesale funding, which increases their exposure to liquidity risks.