Deposit Market Power, Funding Stability and Long-Term Credit

58 Pages Posted: 7 Aug 2019 Last revised: 18 Jan 2021

See all articles by Lei Li

Lei Li

Board of Governors of the Federal Reserve System

Elena Loutskina

University of Virginia - Darden School of Business

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: January 17, 2021

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

Suggested Citation

Li, Lei and Loutskina, Elena and Strahan, Philip E., Deposit Market Power, Funding Stability and Long-Term Credit (January 17, 2021). Darden Business School Working Paper No. 3431932, Available at SSRN: https://ssrn.com/abstract=3431932 or http://dx.doi.org/10.2139/ssrn.3431932

Lei Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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Elena Loutskina (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
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Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

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