Dynamic Banking with Non-Maturing Deposits

Jermann, Urban J.; Xiang, Haotian

doi:10.2139/ssrn.3775790

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Dynamic Banking with Non-Maturing Deposits

32 Pages Posted: 18 Feb 2021 Last revised: 5 Apr 2023

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Haotian Xiang

Guanghua School of Management, Peking University

There are 2 versions of this paper

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The majority of bank liabilities are deposits typically not withdrawn for extended periods.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

Jermann, Urban J. and Xiang, Haotian, Dynamic Banking with Non-Maturing Deposits (January 29, 2021). Available at SSRN: https://ssrn.com/abstract=3775790 or http://dx.doi.org/10.2139/ssrn.3775790