The Passthrough of Treasury Supply to Bank Deposit Funding

96 Pages Posted: 9 Jan 2019 Last revised: 31 Dec 2021

See all articles by Wenhao Li

Wenhao Li

University of Southern California - Marshall School of Business

Yiming Ma

Columbia University - Columbia Business School

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 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

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 California 90089
United States

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

Yiming Ma (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Yang Zhao

Stanford University, Graduate School of Business ( email )

Stanford, CA
United States

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