How Monetary Policy Changes Bank Liability Structure and Funding Cost

39 Pages Posted: 12 Mar 2015 Last revised: 25 Nov 2018

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2018

Abstract

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

Girotti, Mattia, How Monetary Policy Changes Bank Liability Structure and Funding Cost (November 23, 2018). Available at SSRN: https://ssrn.com/abstract=2577201 or http://dx.doi.org/10.2139/ssrn.2577201

Mattia Girotti (Contact Author)

Banque de France ( email )

Paris
France

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