The Passthrough of Treasury Supply to Bank Deposit Funding

70 Pages Posted: 9 Jan 2019 Last revised: 7 Jul 2020

See all articles by Wenhao Li

Wenhao Li

University of Southern California - Marshall School of Business

Yiming Ma

Columbia University - Columbia Business School, Finance

Yang Zhao

Stanford University, Graduate School of Business

Date Written: December 6, 2019

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 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 of imperfect deposit competition. Consistent with The Deposits Channel of Monetary Policy, the model and empirics predict the opposite effect for Fed Fund rate hikes: there is a larger response in less competitive markets. Our results also shed light on the effect of the Reverse Repurchase (RRP) Facility on monetary policy passthrough.

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

JEL Classification: G21, E50

Suggested Citation

Li, Wenhao and Ma, Yiming and Zhao, Yang, The Passthrough of Treasury Supply to Bank Deposit Funding (December 6, 2019). Columbia Business School Research Paper, USC Marshall School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3311314 or http://dx.doi.org/10.2139/ssrn.3311314

Wenhao Li

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

HOME PAGE: http://www.wenhao-li.com

Yiming Ma (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

NY
United States

Yang Zhao

Stanford University, Graduate School of Business ( email )

Stanford, CA
United States

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