Deposits and Relationship Lending

Posted: 7 May 1999

See all articles by Mitchell Berlin

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Abstract

We empirically examine whether access to deposits with inelastic rates (core deposits) permits a bank to make contractual agreements with borrowers that are infeasible if the bank must pay market rates for funds. Such access insulates a bank?s costs of funds from exogenous shocks, allowing it to insulate its borrowers against exogenous credit shocks. We find that, controlling for loan market competition, banks funded more heavily with core deposits provide more loan-rate smoothing in response to exogenous changes in aggregate credit risk. Thus, we provide evidence for a novel channel linking bank liabilities to relationship lending.

JEL Classification: G21

Suggested Citation

Berlin, Mitchell and Mester, Loretta J., Deposits and Relationship Lending. Review of Financial Studies, Vol. 12, Issue 3, 1999. Available at SSRN: https://ssrn.com/abstract=161664

Mitchell Berlin (Contact Author)

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
215-574-3822 (Phone)
215-574-4364 (Fax)

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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