The Passthrough of Treasury Supply to Bank Deposit Funding

Abstract

We demonstrate the passthrough of Treasury supply to deposit funding through bank market power. We show that an increase in Treasury supply leads to net deposit outflows that contract lending to the real economy. The effect is heterogeneous---banks in more competitive markets experience stronger deposit outflows and larger cuts to loan growth. The explanatory power of Treasury supply is not driven by monetary policy and banks' investment opportunities. We rationalize our empirical findings with a model of imperfect deposit competition. Consistent with Drechsler, Savov and Schnabl (2017), the model and empirical evidence predict the opposite effect
for monetary policy rate hikes: there is a larger response in less competitive markets.

Keywords: safe assets, bank deposits, deposit competition, treasury supply, monetary policy

JEL Classification: G21, E50