Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

FEDS Working Paper No. 2021-027

Swiss Finance Institute Research Paper No. 19-44

69 Pages Posted: 2 Dec 2018 Last revised: 11 Jun 2021

See all articles by Yavuz Arslan

Yavuz Arslan

University of Liverpool Management School

Ahmet Degerli

Board of Governors of the Federal Reserve System

Gazi Kabas

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Multiple version iconThere are 3 versions of this paper

Date Written: November 7, 2018

Abstract

We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their precautionary savings. Since deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies squeeze their small business lending. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth.

Keywords: Bank funding, Bank lending, Precautionary saving, Unemployment Insurance

JEL Classification: G21, J65, D14, J20

Suggested Citation

Arslan, Yavuz and Degerli, Ahmet and Kabas, Gazi, Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks (November 7, 2018). FEDS Working Paper No. 2021-027, Swiss Finance Institute Research Paper No. 19-44, Available at SSRN: https://ssrn.com/abstract=3280437 or http://dx.doi.org/10.2139/ssrn.3280437

Yavuz Arslan

University of Liverpool Management School ( email )

Ahmet Degerli (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gazi Kabas

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

HOME PAGE: http://https://sites.google.com/view/gazikabas/home

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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