Dynamic Banking with Non-Maturing Deposits
32 Pages Posted: 18 Feb 2021 Last revised: 5 Apr 2023
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Dynamic Banking with Non-Maturing Deposits
Dynamic Banking with Non-Maturing Deposits
Date Written: January 29, 2021
Abstract
The majority of bank liabilities are deposits typically not withdrawn for extended periods. We propose a dynamic model of banks in which depositors forecast banks’ leverage and default decisions, and withdraw optimally by trading off current against future liquidity needs. Endogenous deposit maturity creates a time-varying dilution problem that has major effects on bank dynamics. Interest rate cuts produce delayed increases in bank risk which are stronger in low rate regimes. Deposit insurance can exacerbate the deposit dilution and amplify the increase in bank risk.
Keywords: Debt maturity, dilution, time inconsistency, monetary policy
JEL Classification: G21, G28, E44
Suggested Citation: Suggested Citation