Deposit Market Power, Funding Stability and Long-Term Credit

Abstract

This paper shows that by reducing the cyclicality of deposit costs and internal funds (profits), deposit market power reduces banks’ funding risk and provides the flexibility to originate long-term loans. Banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those one standard deviation below average. Deposit market power also allows banks to charge lower maturity premiums. This has real effects: access to banks raising funds in less competitive markets improves growth in bank-dependent borrowers needing long-term finance. Deposit market power, by increasing long-term credit supply, helps alleviate credit cycles.

Keywords: Deposit Market Power, Funding Stability, Loan Maturity, Maturity Premium, Credit Supply

JEL Classification: G21