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 banks widen their deposit spread as Treasury supply increases, leading to a net deposit outflow. At the same time, reliance on wholesale funding decreases. The effect is heterogeneous in nature - banks in more competitive markets experience larger outflows. The explanatory power of Treasury supply is not driven by monetary policy and bank-specific investment opportunities. Our empirical findings are rationalized with a model, in which banks' market power stems from the presence of inattentive depositors. Consistent with the Deposits Channel of Monetary Policy (Drechsler et al., 2016), the model and empirics predict the opposite effect for Fed Fund rate hikes: larger response in less competitive markets. Our results also shed light on the effect of extending the scope of monetary policy through the Reverse Repurchase Facility (RRP) on monetary policy passthrough.

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

JEL Classification: G21, E50