How Monetary Policy Changes Bank Liability Structure and Funding Cost
39 Pages Posted: 12 Mar 2015 Last revised: 25 Nov 2018
Date Written: November 23, 2018
U.S. banks obtain most of their funding from a combination of low-interest deposits and high-interest deposits. Using local demographic variations as instruments for banks’ liability composition, I show that when monetary policy tightens, banks with a larger proportion of low-interest deposits on their balance sheet experience larger increases in their high-interest deposit rate and lend less. This happens because tight monetary policy reduces the quantity of low-interest deposits available to banks, and banks react by issuing more high-interest deposits. As it is increasingly expensive, that substitution is not complete, and leads to a reduction in lending.
Keywords: Banks, Deposits, Lending Channel, Monetary Policy
JEL Classification: G21, E44, E50
Suggested Citation: Suggested Citation