The Passthrough of Treasury Supply to Bank Deposit Funding
70 Pages Posted: 9 Jan 2019 Last revised: 7 Jul 2020
Date Written: December 6, 2019
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: Suggested Citation